Bernanke Says Downgrade Didn’t Help

In his speech given at Jackson Hole, Wyoming, Federal Reserve Bank Chairman Ben Bernanke complained that the recent downgrade of the U.S. debt by Standard & Poor’s and congressional budget battles were counterproductive to recovery.

First, he discussed how much had been done to address the root causes of the 2008 financial crisis that sparked the recession including a “substantial program of financial reforms” that had led to a significant improvement in the U.S. banking system and financial markets.

However he believes that “financial stress” continues to negatively impact the recovery, both in the U.S. and abroad. “Bouts of sharp volatility and risk aversion in markets have recently re-emerged in reaction to concerns about both European sovereign debts and developments related to the U.S. fiscal situation, including the recent downgrade of the U.S. long-term credit rating by one of the major rating agencies and the controversy concerning the raising of the U.S. federal debt ceiling.”

He admitted that the impact of these events can’t be judged exactly, however, “there seems little doubt that they have hurt household and business confidence and that they pose ongoing risks to growth.”

S&P Gives Sub Prime Mortgage Backed Securities a AAA Rating

Bloomberg News reports that Standard & Poor’s is prepared to give an upcoming bond issue by Springleaf Finance Corporation a AAA rating. Hoover’s describes Springleaf Finance Corporation as an originator and servicer of first and second real estate mortgages. Most of these “are categorized as subprime or nonprime loans.”

Bloomberg writes, “S&P is poised to provide AAA grades to 59 percent of Springleaf Mortgage Loan Trust 2011-1, a set of bonds tied to $497 million lent to homeowners with below-average credit scores and almost no equity in their properties.”

Subprime mortgage-backed securities that were rated AAA and then later failed spectacularly are considered by many to be a key contributing factor to the financial crisis in ’08 and the subsequent recession.

What is old is new again. However, what S&P rates and what investors buy is a private matter. Let’s go back to caveat emptor.

Rating Agencies Attempt To Calm Fears About Japan’s Sovereign Debt

The Financial News reports that Moody’s Investors Services senior vice president Thomas Byrne wrote, “the shock from Friday’s earthquake does not make a fiscal crisis in Japan imminent. The country’s deep and liquid government debt market will likely continue to fund government deficits, even a larger deficit as a result of the earthquake, at an exceptionally low cost.”

Mr. Byrne also mentioned that The Bank of Japan had provided Y55bn ($670m) of emergency liquidity to 13 banks.

Similarly Standard and Poor’s assured that although the country had suffered “significant” fiscal and economic shock, Japan’s AA- sovereign rating was not at risk. However the Financial News quoted Standard and Poor’s as cautioning that the problems with the nuclear reactors were troubling, “Whether the macroeconomic damage is short-term or more prolonged depends on the outcome of the situation with the nuclear reactors, an event that is still unfolding, and time needed to recover the output of electricity sufficient to cover demand.

The global head of sovereign ratings at Fitch Rating Fitch, David Riley, was reported to have emailed that, “It’s too early to estimate the economic impact of these tragic events.”

Standard & Poor’s Predicts Unsustainable Debt

In a recently published report by Standard & Poor’s Ratings Services, “Global Aging 2010: An Irreversible Truth,” government debt of countries with advanced economies could reach over 300% of GDP within 40 years.

It is the opinion of Standard & Poor’s that the aging population could dramatically impact the prospects for economic growth while simultaneously facing greater budgetary pressures from increased age-related spending.

To counter this trend, the rising debt, and the negative impact on sovereign debt ratings, European governments have been attempting to make budgetary adjustments and to reform pension and health-care systems. These measures have been facing fierce union protests in France, Greece and most recently Italy.

In their press release, Standard & Poor’s quotes their own credit analyst Marko Mrsnik as saying, “No other force is likely to shape the future of national economic health, public finances, and national policies as the irreversible rate at which the world’s population is growing older. The projected deterioration in public finances between now and 2050 is particularly significant in advanced economies, whereas many emerging market sovereigns outside of Europe will have a slightly more positive trajectory. In these cases population aging is projected to take place against the background of relatively higher economic growth than in advanced sovereigns. However, as the emerging sovereigns develop, with associated widespread changes to the social fabric, government welfare spending may grow faster than GDP as has been the trend in advanced economies during the last half of the 20th century.”