US must cut spending to save AAA rating, warns Fitch - 7:25 pm

Rah Ro!  From the Telegraph.co.uk

US must cut spending to save AAA rating, warns Fitch

Fitch Ratings has issued the starkest warning to date that the US will lose its AAA credit rating unless acts to bring the budget deficit under control, citing a spiral in debt service costs and dependence on foreign lenders.

Brian Coulton, the agency's head of sovereign ratings, said the US is shielded for now by its pivotal role in global finance and the dollar's status as the key reserve currency, but the picture is deteriorating fast enough to ring alarm bells.

"Difficult decisions will have to be made regarding spending and tax to underpin market confidence in the long-run sustainability of public finances. In the absence of measures to reduce the budget deficit over the next three to five years, government indebtedness will approach levels by the latter half of the decade that will bring pressure to bear on the US's 'AAA' status", he said.

Fitch expects the combined state and federal debt to reach 94pc of GDP next year, up from 57pc at the end of 2007. Federal interest costs will reach 13pc of revenues, meaning that an eighth of all taxes will go to service debt. Most fiscal experts view this level as dangerously close to the point of no return for debt dynamics.

The rating alert is a reminder that fiscal stimulus and bank rescues across the world have merely shifted private debt on to public shoulders. The bail-outs looked deceptively 'costless' at the time, but the damage to sovereign states may take years to repair. The US Treasury says interest payments as a share of GDP will rise to 3.6pc by 2016, the highest since data began in 1940 – when it was 0.8pc.

Mr Coulton said the US is vulnerable to "potential interest rate shocks" due to its reliance on short-term debt and foreign investors. The average maturity of US government debt has fallen to four years, compared to seven for Europe's AAA club, and 10 for Britain. "The share of three-month bills has risen very sharply as a result of recapitalising banks," he said.

This raises the danger of a roll-over crisis. Chinese, Japanese, and Mid-East investors own almost half of the stock of US debt. They are more likely to liquidate holdings than domestic investors, if there were a loss of confidence in Washington or the Federal Reserve. Short maturities mean that any jump in interest rates will be felt quickly.

Stephen Lewis, of Monument Securities, said a US downgrade would rip the anchor from the global system and pose a grave risk to the stability. "This would set off tremors, making all dollar assets less secure. You could argue that the reason why the rating agencies have not already downgraded the US and Britain is that they fear the consequences for the global economy if they pull the trigger," he said.

While US debt was higher after World War Two, circumstances were very different. The age structure was healthier. Most bonds were held by Americans. Demobilisation of the troops allowed for drastic budget cuts. America had emerged as the world's strategic and economic Colossus. This time the US cannot rely on exuberant growth to whittle down the debt.

Related: America slides deeper into depression as Wall Street revels - Telegraph

Pre-market - January 5 - 2nd trading day of the year - 7:50 am

Futures flat this morning before some important economic data.

Today's economic calendar:
Motor Vehicle Sales
ICSC-Goldman Store Sales 7:45 AM ET
Redbook 8:55 AM ET
Factory Orders 10:00 AM ET
Pending Home Sales Index 10:00 AM ET
4-Week Bill Auction 11:30 AM ET

Today's earnings reports:
Before open: NONE

After close:
ANGO AngioDynamics Inc. Healthcare Medical Instruments & Supplies
LNDC Landec Corp. Basic Materials Synthetics
MG Mistras Group, Inc. Services Technical Services
SNX SYNNEX Corp. Services Business Services
SONC Sonic Corp. Services Restaurants
TISI Team Inc. Services Business Services

Upgrades:

QCOM	QUALCOMM Inc.	Technology	Semiconductor - Integrated Circuits
KCI	Kinetic Concepts Inc.	Healthcare	Medical Appliances & Equipment
ZMH	Zimmer Holdings Inc.	Healthcare	Medical Appliances & Equipment
ERIC	LM Ericsson Telephone Co.	Technology	Communication Equipment
IPI	Intrepid Potash, Inc.	Basic Materials	Nonmetallic Mineral Mining
POT	Potash Corp. of Saskatchewan, Inc.	Basic Materials	Agricultural Chemicals
AVY	Avery Dennison Corporation	Consumer Goods	Paper & Paper Products

Downgrades:

V	Visa, Inc.	Services	Business Services
CXO	Concho Resources, Inc.	Basic Materials	Oil & Gas Drilling & Exploration
BEXP	Brigham Exploration Co.	Basic Materials	Independent Oil & Gas
COG	Cabot Oil & Gas Corp.	Basic Materials	Independent Oil & Gas
SPW	SPX Corporation	Industrial Goods	Diversified Machinery
FNF	Fidelity National Financial, Inc.	Financial	Surety & Title Insurance
CHKP	Check Point Software Technologies Ltd.	Technology	Security Software & Services
RGC	Regal Entertainment Group	Services	Movie Production, Theaters
BFRM	BioForm Medical, Inc.	Healthcare	Medical Appliances & Equipment
FSP	Franklin Street Properties Corp.	Financial	REIT - Diversified
SLGN	Silgan Holdings Inc.	Consumer Goods	Packaging & Containers
PNY	Piedmont Natural Gas Co. Inc.	Utilities	Gas Utilities
XEL	Xcel Energy Inc.	Utilities	Electric Utilities
GAS	Nicor Inc.	Utilities	Gas Utilities
TE	TECO Energy Inc.	Utilities	Electric Utilities
HMSY	HMS Holdings Corp.	Services	Business Services

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Today's reading as I find them

From Bloomberg - No Good Deed Goes Unpunished as Banks Seek Profits
From Bloomberg - Iceland to Hold Referendum on Icesave Bill After Grimsson Veto
From Reuters - UPDATE 2-Mesa Air Group files for bankruptcy, to cut fleet
From Telegraph UK - Pimco move to sell gilts raises spectre of a UK sovereign debt crisis
From MarketWatch - 12:30 - Fitch cuts Iceland's rating to junk status
From the WSJ - 9:06 - Whitney Downgrades Goldman