Moody’s Affirms U.S. Rating, Warns of Downgrades

Tuesday, August 2, 2011
Us News
Moody’s Investors Service and Fitch Ratings affirmed their AAA credit ratings for the U.S. while warning that downgrades were possible if lawmakers fail to enact debt reduction measures and the economy weakens.

The outlook for the U.S. grade is now negative, Moody’s said in a statement yesterday after President Barack Obama signed into law a plan to lift the nation’s borrowing limit and cut spending following months of wrangling between Democratic leaders and Republican lawmakers.

The compromise “is a positive step toward reducing the future path of the deficit and the debt levels,” Steven Hess, senior credit officer at Moody’s in New York, said in a telephone interview yesterday. “We do think more needs to be done to ensure a reduction in the debt to GDP ratio, for example, going forward.”

JPMorgan Chase & Co. estimated that a downgrade would raise U.S. borrowing costs by $100 billion a year, while Obama said it could hurt the broader economy by increasing consumer borrowing costs tied to Treasury rates. The ratio of general government debt, including state and local governments, to gross domestic product is projected to climb to 100 percent in 2012, the most of any AAA-ranked country, Fitch said in April.

“A downgrade is a sign that Congress is failing to address a real fiscal issue,” Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott LLC in Philadelphia, said in an interview before the announcements.
‘Tough Choices’

A decision on the rating may be made within two years, or “considerably sooner,” according to Moody’s Hess.

Fitch’s David Riley said that while the rating may be cut in the medium term, its risks in the near-term “are not high.” The company expects to complete the ratings review by this month.

“Although the agreement is a good first step in adjusting the fiscal challenges that the U.S. faces, it is just a first step,” Riley, Fitch’s London-based head of sovereign ratings, said in a telephone interview yesterday.

Standard & Poor’s put the U.S. government on notice on April 18 that it risks losing its AAA rating unless lawmakers agree on a plan by 2013 to reduce budget deficits and the national debt. S&P indicated last week that anything less than $4 trillion in cuts would jeopardize the grade.

S&P, which has ranked the U.S. AAA since 1941, rates 18 sovereign issuers as AAA, including Canada, Germany and Singapore, according to Bloomberg data. Spain and Japan are among those ranked at the AA level by ratings company.
Debt-Limit Compromise

So far the threat of losing a AAA rating has been overwhelmed by concerns about a continued slowdown in the U.S. economy, supporting demand for Treasuries. The yield on the benchmark 10-year note fell reached 2.59 percent in Tokyo trading today, extending declines to the lowest since November. The yield is below the 4.05 percent average in the past decade.

A gain in Treasury yields of 50 basis points would reduce U.S. economic growth by about 0.4 percentage points, JPMorgan said in a report, citing Federal Reserve research and data.

Obama signed the debt-limit compromise on the day the Treasury had warned the nation’s borrowing authority would expire, ending a months-long debate that reinforced partisan divisions over federal spending.
Debt-to-GDP

The Senate voted 74-26 for the measure, which raises the nation’s debt ceiling until 2013 and threatens automatic spending cuts to enforce $2.4 trillion in spending reductions over the next 10 years. The House passed the plan Aug. 1.

“While the combination of the congressional committee process and automatic triggers provides a mechanism to induce fiscal discipline, this framework is untested,” Moody’s said in its statement. Moody’s said its baseline scenario assumes that fiscal discipline is maintained in 2012.

“Further measures will likely be required to ensure that the long-run fiscal trajectory remains compatible with a Aaa rating,” Moody’s said. The credit rater expects a stabilization of the federal government’s debt-to-gross domestic product ratio not too far above its projected 2012 level of 73 percent by the middle of the decade, followed by a decline.

Recent downward revisions of growth rates and the very slow expansion recorded in the first half of 2011 call into question the strength of potential growth in the next year or two, Moody’s said. Moody’s, which has rated the U.S. Aaa since 1917, put the U.S. under review for a downgrade on July 13 for the first time since 1996.
Overseas Lenders

Still, U.S. bonds and the dollar’s strength have signaled increased demand for the assets of the world’s largest economy even as prospects of a downgrade rose. Treasury yields average about 0.70 percentage point less than the rest of the world’s sovereign debt markets, Bank of America Merrill Lynch indexes show. The difference has expanded from 0.15 percentage point in January.

Investors from China to the U.K. are lending money to the U.S. government for a decade at the lowest rates of the year. For many of them, there are few alternatives outside the U.S., no matter what its credit rating.

The dollar represents 60.7 percent of the world’s currency reserves, compared with the 26.6 percent for the euro, which has the next biggest portion, according to the International Monetary Fund in Washington.

“Regardless of the rating, Treasuries are going to be seen as the safe haven,” said Matthew Freund, a senior vice president at USAA Investment Management Co. in San Antonio, where he helps oversee about $50 billion in mutual fund assets. “The U.S. remains one of the strongest, most dynamic economies in the world.”

China’s central bank will “closely” monitor U.S. efforts to tackle its debt, Governor Zhou Xiaochuan said in a statement today, reaffirming that his nation will diversify its foreign- exchange reserves. China’s Dagong Global Credit Rating Co. cut its credit rating for the U.S. to A from A+ with a negative outlook, it said in an e-mailed statement today.
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State Department Reassures Groups Aiding Somalia in Food Crisis

The Obama administration sought to assure aid groups on Tuesday that they could deliver desperately needed food to famine-stricken parts of Somalia without fear of prosecution, even if some assistance is diverted to extremists linked to Al Qaeda.

Aid groups had feared that they could be penalized under laws prohibiting material assistance to the Shabab, an Islamist militant group, which has been criticized by humanitarian organizations as contributing to the food crisis.

Administration officials said Tuesday that new guidelines would allow charities to provide famine aid as long as they pledge their best efforts to combat attempts by the Shabab to hoard aid or collect taxes on supplies.

“We’re trying to ease the process for these organizations to get the proper licenses,” Mark Toner, a State Department spokesman, said. Given the widespread violence and corruption in Somalia, he said the United States would exempt aid groups from some legal constraints that would hinder them from reaching starving Somalis.

Drought has left 12 million people in Ethiopia, Kenya and Somalia needing help, though official famine zones are only in Somali areas controlled by the Shabab. No American law prevents aid to Somalia, but paying bribes, tolls and other typical costs of doing business in the country could have been punishable, after the State Department declared the Shabab a terrorist organization in 2008.
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India Against Corruption

India Against Corruption activist Arvind Kejriwal on Monday urged people to participate in large numbers in ‘padyatras’, burning copies of the government’s draft of the Lokpal bill, candle light marches and other activities planned to support social crusader Anna Hazare’s fight for an effective Lokpal to curb corruption.

In a statement issued here, Kejriwal said it was more than evident that the government and all the political parties were unwilling to enact a strong law against corruption because if they did so, many of them would face imprisonment.


 “None of the large scams like the Adarsh, Commonwealth Games, Reddy brothers scam, fodder scam, health mission scam of UP, Jharkhand Mukti Morcha scam, Cash-For-Vote are covered in the government’s Lokpal bill draft. What use is such a Lokpal bill? It is weak and ineffective. It has a very narrow jurisdiction and no corruption faced by a common man is covered under it,” he said.

“Anna’s fast from August 16 is our last hope. We cannot afford to fail this time. For if we fail, we may never get another chance. It’s now or never”, Kejriwal said.


A number of people across the country are planning various protest activities. “From August 1 to 9, people across the country will form small teams and undertake short and long ‘padyatras’. They will talk to people on their way, hold meetings, distribute pamphlets and show the Jan Lokpal film. From August 9, mass burning/tearing of copies of the government’s draft of the Lokpal bill, as a mark of non-violent protest, will be held. Anna is expected to start it from either Delhi or Mumbai. During August 9 to 15, ‘prabhat pheris’ will be held in mornings, where people will sing patriotic songs and educate others about corruption and the Jan Lokpal bill. In the evening, there will be candle light and ‘mashal’ marches,” Kejriwal said.

He has urged people to switch off their lights from 8 pm to 9 pm on August 15 as a mark of support for the anti-corruption movement.


“The government says it will crush Anna’s fast the way it crushed Baba Ramdev’s movement. We are ready for that. We will offer ourselves for arrest if the government decides to arrest us. We are ready to face their batons and bullets. But we will not move from there. We will not retaliate. It will be a completely non-violent movement,” he said. Kejriwal also urged people to take a week off from their work from August 16 and take to the streets and raise slogans against corruption. “Government can impose section 144 at the Jantar Mantar. But will it impose curfew in the whole country? If the whole country takes to the streets, we can force the government to enact a strong Jan Lokpal bill,” he added.
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Ashok Leyland Sees Quarterly Profit Drop 30 Percent

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Ashok Leyland's net profit for the April-June quarter dropped by 30 percent, as local demand for Commercial Vehicles faded and financing costs rose. The Hinduja Group company posted a net profit of RS862.5 million ($19.38 million) in the April-June quarter, compared with RS1.23 billion rupees a year earlier.

Overall vehicle sales fell back by 10 percent from a year earlier to 19,277 units. The company sold 16,738 trucks and buses locally, a drop of 14 percent, while exports grew 31 percent to 2,539 vehicles.


"After the robust growth of 2010-11, the first quarter of this fiscal has seen a significant moderation," managing director Vinod K. Dasari said in a statement. "The rise in cost of ownership due to spiraling input costs, the rise in fuel prices, hardening interest rates and a fall in freight availability all contributed to this moderation."
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