C.M.O. 2.26.2010
Credit Market Overview
February 26, 2010
“Unless further measures are taken to reduce the budget deficit further or the economy rebounds more vigorously than expected, the federal financial picture as presented in the projections for the next decade will at some point put pressure on the [United State’s] Aaa government bond rating.” So wrote Moody’s Investor Service earlier this month.
“That will never happen to this country”, was Treasury Secretary Timothy Geithner’s response when appearing on ABC’s “This Week” the Sunday after the Moody’s announcement.
For all of the criticism hurled at the rating agencies it would appear that Moody’s warning is one worth recognizing and also worthy of a more credible response than channeling your best John Wayne while drawing a line in the sand, especially when the current administration has raised spending to a peacetime record of 25% of GDP with 4% of that being used to grow the size of the government itself.
Uncle Sam’s liabilities and the currency in which they are denominated are still the place to be when everyone is too scared to be anywhere else. Mr. Geithner echoed this sentiment during that same T.V. appearance saying “That is a very, very important sign of basic confidence in our capacity as a country to work together to fix these problems”.
I am not sure, however, whether it is a true sign of the world’s confidence in out ability to get our financial house in order or the simple fact that at present we are still the world’s largest, most open economy, with the world’s largest military and should things really get ugly will probably be the last house to fall.
The latest budget will add $1.3TN to the national debt after $1.6TN was added in 2009. This is not necessarily a bad thing according to the IMF as that institution has consistently warned against the repercussions of removing stimulus too soon. Unfortunately that’s a song politicians from both sides of the aisle will be all too happy to sing during the run up (no pun intended) to this year’s mid-term elections.
As the problems with the PIIGS will attest however, when your outflow exceeds your inflow, your upkeep becomes your downfall.
Times of crisis demand a brave heart and bold action but it is equally important to calm one’s self quickly once the crisis has past. Mssrs. Paulson, Summers, Geithner and most definitely Bernanke did what was necessary to pull the world back from the precipice after Lehman’s collapse. But as Robert Borosage of the Campaign for America’s Future wrote recently, “Time Magazine’s naming Ben Bernanke ‘Man of the Year’ is a little bit like celebrating an arsonist for his heroics in putting out a fire he set”.
While there might be some “populist” truth to that I’m not sure ‘ol Ben is the only one today holding a burn match in his hand and as Jeff Merkley (D.OR) said “he did a good job with the fire hose this last year”. Mr. Merkley then added, “but he certainly also-in his roles over the last eight years-he helped create the circumstances that set the house on fire”.
The important question for all involved is, will they know when to shut the water off?
CDS levels for the U.S. of A. have come off their recent peak of 63bps hit on 2/8, traded down to 43bps on 2/19 and close last night at 46bps. This reflects an almost across the board increase in sovereign CDS levels during the height of the most recent passing of the PIIGS parade with the Hellenic debt hogs leading the way.
To the extent the market abhors uncertainty there could be a further reduction in sovereign CDS spreads around the world if the Greeks deal with the issues at hand. Once that happens we should just about be ready for Spain!
Enjoy the weekend.
Jim Delaney
