Great news from Moody’s and Fitch: Hopelessly bankrupt country to retain AAA rating for a little while longer

posted at 7:55 pm on August 2, 2011 by Allahpundit

We did it.

On Tuesday, Fitch Ratings said the agreement to raise the debt ceiling and make spending cuts was an important first step but “not the end of the process.” The rating agency said it wants to see a credible plan to reduce the budget deficit “to a level that would secure the United States’ `AAA’ status.”

And late on Tuesday, Moody’s Investors Service assigned a negative outlook to U.S. debt, but confirmed its AAA rating — for now. A negative outlook means the rating agency could lower the rating in the next 12 to 18 months. Moody’s said that continued slow economic growth, higher interest rates could lead to a downgrade. Moody’s also said weak fiscal discipline in the coming year could do the same…

“Growth healed all wounds in 1995,” [Federated Investors' Joe] Balestrino said. “However, now the U.S. doesn’t have enough vitality to grow its way out.”…

Because of that, many analysts believe that U.S. debt will eventually be downgraded to AA. And if that happens, it could be tough to regain the AAA rating.

“If the economy won’t grow at 2.5 percent over the long term, it has pretty profound implications from a fiscal point of view,” said Riley, the Fitch managing director.

Big rally on Wall Street today to celebrate the good-ish news, right? Why, no: The S&P500 was down for the eighth day in a row, its worst streak since the last financial crisis in 2008, and actually sunk below its 200-day moving average, which signals a longer downward trend. The losses were a reaction to the new manufacturing numbers, the latest sign of our comatose recovery, but no doubt some diehard Keynesian somewhere is blaming the spending cuts in the debt-ceiling deal for the pain. Read Conn Carroll for a reply to that. So modest are the up-front cuts in the new law that they amount to a rounding error for GDP purposes. And if you think things can’t get worse, then (a) you’ve forgotten that the July unemployment numbers are due Friday and (b) you really haven’t been paying attention the past two and a half years. You don’t have to be an eeyore to spot the trendlines in Hopenchange.

Here’s Erin Burnett speculating, not unreasonably, that the markets have already downgraded the U.S. due to the meagerness of the new savings in the debt-ceiling deal, notwithstanding Moody’s and Fitch’s rubber stamp. If you’re despairing about that, Major Garrett makes a smart/harrowing point: The GOP was so effective in using the threat of default to move Democrats towards their position on deficit reduction that this tactic is bound to be used again, by both sides. That’s bad news if you’re devoutly opposed to new revenues but good news if you’re devoutly intent on shrinking the debt — unless of course it results in tax hikes that slow economic growth to the point where there’s not much new revenue after all. Exit question: Keith Hennessey proposes a Super Committee strategy for the GOP by which all six members would band together and hold out for serious entitlement reform. I’m all for it, except that Pelosi’s crew will be holding out for exactly the opposite. Doesn’t that guarantee the Committee will fail and the triggers will kick in? I get that Democrats don’t want to see eight percent in across-the-board discretionary cuts, but they really, really, really don’t want to jeopardize their Mediscaring message before the election by dealing on entitlements.

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