Sunday, August 7, 2011

$2 Trillion "Dispute Over ‘Basic Math’", a Must Read Rating Cut Presentation, and Italy and Germany

"...John Bellows, the Treasury’s acting assistant secretary for economic policy
...found what he later called a $2 trillion “basic math error”
in ...a preliminary press release announcing S&P’s first-ever downgrade of U.S. creditworthiness.

...S&P...used figures from the Congressional Budget Office.

The discrepancy didn’t change the downgrade decision, S&P said,
because Treasury’s $2 trillion figure was derived by calculating government debt
over a 10-year period while S&P’s ratings are determined
using a three- to five-year time horizon.

...“The primary focus remained on the current level of debt,
the trajectory of debt as a share of the economy,
and the lack of apparent willingness of elected officials as a group
to deal with the U.S. medium-term fiscal outlook,” S&P said.

The math error, along with S&P’s decision to include U.S. state and local debt
in its decision to downgrade, when state and local governments
can cut or tax their way to fiscal health,
are part of the controversial back story to S&P’s historic move."

...its “decision to downgrade the U.S. was based in part on the fact
that the Budget Control Act, which will reduce projected deficits
by more than $2 trillion over the next 10 years,
fell short of their $4 trillion expectation for deficit reduction.”

...pressures are expected to arise due to teetering entitlement programs such as Medicare,
as the baby boomers are set to retire en masse.

“None of these key factors was meaningfully affected by the assumption revisions
to the assumed growth of discretionary outlays
and thus had no impact on the rating decision.”

...Moody’s and Fitch both said that downgrades were possible
if lawmakers failed to enact debt reduction measures and the economy weakened..."

Ian Katz

Italy has the third largest bond market in the world (after the US and Japan),
and it's teetering on the brink of disaster.

The belief in Germany is that existing bailout mechanisms
aren't sufficient to save the country and that expanding them isn't the right idea,
since at that point you're talking about placing massive risk on Germany's sovereign debt itself."

A Thorough Look At The Downgrade,
And What It Means For Markets And The Economy

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