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Tower questions US credit rating


Friday 5th August 2011 4 Comments

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One of New Zealand's biggest institutional investors has questioned how long the United States Government can continue to justify top international credit ratings on its Treasury debts.

"It doesn’t look like the American federal government’s AAA credit rating on its Treasury debts can be justified for much longer," Tower Investments chief executive Sam Stubbs said.

"July was another month of threatened sovereign debt crisis narrowly averted,” he said.

Political brinksmanship in Washington had "clobbered" sharemarkets internationally as investors became nervous over the possibility that the US might stop paying its debts.

The US could lose its top-notch credit rating in the next few weeks if lawmakers fail to increase the country's debt ceiling, forcing the government to miss debt payments, Moody's Investors Service warned on Wednesday.

Some big rating agencies last month placed the US key credit ratings on review for a possible downgrade, if there was a default on US Treasury debt obligations, as politicians argued over raising the nation's legal debt limit of $US14.3 trillion ($NZ16.8 trillion), which it reached on May 16.

"No one knows quite how much of a disaster the looming credit downgrade of the American government’s IOUs could inflict on financial markets, but the $US14 trillion US Treasury bond market is the single largest security market in the world," Stubbs said.

The bonds were held by banks, pension funds, corporates and insurers such as his own company, as the benchmark in "safe" securities.

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Comments from our readers

On 5 August 2011 at 8:57 am Peter Flannery said:
A classic case where truth is stranger than fiction. With total debt approaching 375% of GDP in the US (not to mention the drain on that GDP to now service that debt) I too would be interested to klnow how any ratings agency can justify the current (so called) AAA rating. It looks odd...
On 5 August 2011 at 9:16 am Dirk said:
The AAA rating for US sovereign is surprising. My understanding of sovereign debt was that it UNCONDITIONALLY requires payment of interest and principle by due date. In the US case Congress/Government appears to decide from time to time whether or not the US should continue to meet its commitments (raising debt ceiling). This seems incompatible with a AAA rating. Could it be that the major rating agencies which are all US based are more lenient with with assessments of their parent Government than others?
On 6 August 2011 at 4:08 pm Alberre said:
"With holding supply"is not confined to the USA but nonetheless the demise of the USA is now writ in red neon given the abysmal state of their economy and the unfortunate quality of their politicians from the President down.Just as unfortunate, the same people (the ratings agencies) who were huge contributors to the GFC, still have a major influence,and now they are with holding that influence by dithering over a rating for the USA which is patently wrong.
On 8 August 2011 at 4:27 pm nevvy said:
Whats the bet after a collapse in the treasury market/US dollar they will be forced to back their currency with gold again.Its the only way back to credibility for them, imho.Providing of course their gold reserves (8000 odd tons last audited 1953) are still in existence.
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