Next Stop: US sovereign debt downgrade

We bailed out Bear Stearns. We have effectively said we are bailing out Fannie and Freddie. Who’s next? All of this is only going to increase U.S. Government debt.

Is this where we’re headed? Note the last part in red:

From 2002:

Japan’s credit rating could be lowered again soon because the country is not moving fast enough to deal with deflation and debt, the rating agency Moody’s Investors Service said today.

Moody’s said it was reviewing Japan’s yen-denominated debt for a possible downgrade in the next three months. Moody’s lowered the rating on Dec. 4 to Aa3, tied with Italy for weakest among the Group of 7 major economies.

”The longer it takes for the government to fashion an effective policy response to deflation, the more complicated solving other economic problems becomes,” the agency said, adding that further government inaction could lead to still more downgrades.

The warning from Moody’s — a move the finance minister, Masajuro Shiokawa, called ”unfortunate” — increases the pressure on the government of Prime Minister Junichiro Koizumi to come up with substantial measures this week, before President Bush arrives on Sunday, to overhaul the stagnant economy and keep prices from falling.

Moody’s noted in its announcement that if conditions in Japan grew any worse, ”there could be credit risk contagion between domestic and foreign financial markets,” and Japan’s woes could begin taking a toll in the United States.

Japan’s Council on Economic and Fiscal Policy, a high-level government committee, met on Tuesday to draw up a strategy to combat deflation, which Moody’s said was making ”a serious government debt problem worse.” The panel is expected to propose having the Bank of Japan buy more government bonds, and it may call for a new bailout of the banking system using tax money.

Hopes for such a bailout have recently buoyed the stock market, which has risen 5.8 percent in four trading sessions after sinking to an 18-year low.

But enthusiasm for the idea is already fading. At a policy meeting on Friday, the central bank left its monetary stance unchanged. An entity created to buy stocks from banks will begin operating on Friday, but it will be given only limited resources.

Mr. Koizumi and his top financial regulator, Hakuo Yanagisawa, have squashed talk that the government will simply force taxpayer money on all the banks. Mr. Yanagisawa told reporters that in any bailout plan banks would have to apply formally for funds. Because doing so would cede more control of their institutions to the government, bank managers may be unwilling to do so, analysts said.

The government already possesses the regulatory tools to take over banks in the event of an emergency, but politicians are reluctant to declare one for fear of further scaring already skittish savers and investors.

”Yanagisawa is too cautious about disturbing the financial order,” said Tomohito Shinoda, a professor at the International University of Japan Research Institute.

Several analysts compared the dangers of the slow approach to a frog and a soup pot: drop the frog in hot water and it will jump right out, but put it in tepid water and then turn up the heat, and the frog will stay and die. By mainly trying to avoid a sharp shock, the analysts said, the Japanese leadership is keeping the country immobile in the soup.

And on the debt front, the temperature is rising. The government expects to owe 693 trillion yen ($5.2 trillion) in long-term debt by March 2003, equivalent to 140 percent of the country’s gross domestic product or more than $45,000 for each citizen. Financial commitments to state-sponsored companies add further to the burden.’

Japan’s Debt Under Study For New Cut In Rating, 14 Jul 2002

The big difference? The Japanese are savers and can fund their own deficit spending. The U.S. government is beholden to the governments of Japan, China and many more because Americans don’t save. It sounds to me like interest rates are going to rise.

1 Comment
  1. Anonymous says

    but isnt that the debt rating should be based on your actual production vs spendings taking into your measures to control the debt, rather than just the ratio of debt/gdp ? else, you dont consider the rate of control of debt.

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