–Egan-Jones:QE3 will likely Trigger A Negative Action
–Affirms U.S. at AA; Negative Outlook

By Yali N’Diaye

WASHINGTON (MNI) – In its latest update on the U.S. sovereign
rating, Moody’s confirmed Tuesday that fiscal developments top other
considerations, including economic developments, when it comes to
assessing the U.S. sovereign rating, while reaffirming the time frame of
any rating action.

Moody’s, which had already said it would not act until 2013 on the
U.S. sovereign rating, reiterated its position Tuesday. This time, it
specified that maintaining the current Aaa with a negative outlook into
2014 was “unlikely,” making the 2013 deadline as the most likely.

“Budget negotiations during the 2013 Congressional legislative
session will likely determine the direction of the U.S. government’s Aaa
rating and negative outlook,” Moody’s said in its report “Update of the
Outlook for the US Government Debt Rating.”

“It is difficult to predict when during 2013 Congress will conclude
negotiations that result in a budget package,” Moody’s said. As a
result, “The Aaa rating, with its negative outlook, is likely to be
maintained until the outcome of those negotiations becomes clear.”

“If those negotiations lead to specific policies that produce a
stabilization and then downward trend in the ratio of federal debt to
GDP over the medium term, the rating will likely be affirmed and the
outlook returned to stable,” it said.

“If those negotiations fail to produce such policies, however,
Moody’s would expect to lower the rating, probably to Aa1,” it added.

Moody’s joined rating agencies Standard & Poor’s and Fitch in
making clear that fiscal issues top rating agencies’ concerns.

In fact, Egan-Jones, which Tuesday affirmed the U.S. rating at AA
with a negative outlook, said “U.S. fiscal policy is disconcerting with
trillion dollar plus deficits for four years and a national debt over
$16 trillion.”

It added that “Plans to reduce the budget deficit by both parties
are inadequate.”

For Standard & Poor’s, “The U.S. fiscal profile has continued to
gradually deteriorate since last summer, at a rate in-between our
base-case scenario and our downside scenario of August 2011, keeping the
U.S. at the high end of our indebtedness range,” lead analyst for the
United States Nikola Swann told MNI in August.

Going forward, “Pressure on the rating could build if, in our view,
elected officials remain unable to agree on a credible, medium-term
fiscal consolidation plan that represents significant, even if gradual,
fiscal tightening beyond that envisaged in BCA11,” he said, referring to
the Budget Control Act of 2011.

Fitch also raised the sense of urgency, as its latest Risk Radar
published in August indicated that developments surrounding the U.S.
labor market and the U.S. fiscal policy pose a bigger and more urgent
risk to the country’s sovereign rating than they did just a few months
ago.

Still, the economy matters.

While “Fiscal policy actions will be the most important determinant
of the debt trajectory over the coming decade,” Moody’s said, “the
economic outlook is another key determinant that affects revenues as
well as spending.”

For Egan-Jones, “A major issue is that if the U.S. is running hefty
deficits with an economic recovery and depressed interest rates, the
deficits might grow faster under less salubrious conditions.”

And as Federal Reserve watchers consider there is a strong chance
of a third round of quantitative easing to help support growth through
low interest rates, Egan Jones warned Tuesday that “Prospects of QE3 is
unlikely to enhance real GDP or reduce sovereign debt but is likely to
inflate costs, placing additional strain on US consumers.”

In fact, “QE3 will likely trigger a negative action,” Egan-Jones
said.

** MNI Washington Bureau: 202-371-2121 **

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