Runaway U.S. debt: When even Moody’s starts sounding alarm bells, trouble is on the horizon

America's Debt Gets Scary
(The Daily Beast) -- by Charlie Gasparino --

The country’s top-notch credit rating is in danger of being downgraded, Moody’s is warning—and if a ratings agency that completely failed to predict the financial crisis is sounding the alarm, we should all be afraid.

Here’s how you know the massive amounts of debt compiled by the Bush administration, and the even greater debt loads promised as part of Barack Obama’s agenda, is reaching crisis proportions: Even the Wall Street bond-rating agencies are now sounding the alarm bells...

The U.S. government—as far as I know—doesn’t pay Moody’s or any of the other agencies, but the report calling into question the U.S. triple-A rating contains all the ass covering the rating agencies are famous for. Consider this: While Moody’s was raising the notion of a downgrade of U.S. debt based on the massive debt the country has accumulated and will accumulate in the coming years—causing the stock markets to fall in early morning trading—the agency also said the U.S. still has the ability to cover debt-interest payments with current revenue, though that revenue may not be enough given the weak economy and increased spending.

Of course, the U.S., like other highly indebted countries, can take steps to lower its debt load (i.e. higher taxes and cutting spending) though Moody’s says those steps “will test social cohesion.” You get my point.

Meanwhile, the raters’ track record in predicting a crisis of this magnitude is pretty weak, as well. Many of those esoteric bonds that were held on the books of the banks and later destroyed the financial system in 2008 because they were worth pennies on the dollar were rated triple-A.

The raters, for example, gave Orange County, California, high grades before its bankruptcy in 1994, failed to see the bond-market implosion in 1998, and had no idea that the housing market was catering in 2007, until it cratered, and the bonds backed by risky mortgages were defaulting and spreading a virus that, save for a government bailout, would have destroyed what was left of the financial system.

That said, the current warning shouldn’t be taken lightly, precisely because ratings agencies like Moody’s have been so late in the past. Calling attention to the country’s debt level must mean we are really heading for trouble...MORE...LINK