A recent Financial Times noted that the proposed overhaul of US financial rules threatens the credit ratings of Bank of America and Citibank. Standard & Poor’s, one of the world’s top two credit rating agencies, says that as proposed, the rules would make it less likely that the banks would be bailed out by taxpayers if the bank ran into trouble again.
BofA and Citibank are two of the world’s largest lenders. If their credit ratings go down, their costs of borrowing will go up, resulting in higher costs for borrowers. Looks like another barrier to a quick turnaround in the world’s economy.
Meanwhile, Moody’s, the other premier credit rating agency, warned early this month, again according to the Financial Times, that “the triple A sovereign credit rating of the US would come under pressure unless economic growth was more robust than expected or tighter action was taken to tackle the country’s budget deficit.”
The Obama administration’s proposed budget for 2010 forecasts a deficit of $1,565 billion ($1.565 trillion), which is 10.6% of projected gross domestic product, the highest ratio of debt to GDP since WWII. Even more alarming, projections of the overall debt-to-GDP ratio for the US are seen as rising from 53% in 2009 to 73% in 2015 and 77% by 2020.
Still, Moody’s says this understates the overall US debt level.
“Using the general government measure, including state and local governments as well as the federal government, which is used internationally, this ratio would be over 100 percent in 2020.”
Ironically, a few days ago gold’s sharp price decline was attributed to money pouring into dollars because of concerns of how Greece’s financial problems would impact the European Union and its currency, the euro. It appears that scared money moved from the weak to the less weak.