WSJ U.S. rating risk report adds to dollar woes

LONDON, Dec 7 (Reuters) - The notion that rating agencies may one day downgrade the U.S. government's triple-A bond rating triggered financial market discussion on Tuesday about the previously unthinkable and added more pressure to the dollar.

An article in the Wall Street Journal Europe said that analysts and investors had begun to "question the unquestionable" amid worries about budget and trade deficits and the weak dollar.

The article made no suggestion that any downgrade was actually in the works from the big three ratings agencies -- Moody's, Standard and Poor's and Fitch.

But it cited a research note by a small agency, Egan-Jones Ratings, saying the United States should have just a double-A rating, and quoted Steven Hess, Moody's senior credit officer, saying "at some date" the triple-A rating could be in jeopardy if authorities did not act to improve U.S. finances.

The mere fact that the U.S. finances have deteriorated to the point where such an issue could be floated raised eyebrows.

"A U.S. ratings downgrade may not be imminent but it's food for thought," Paul Mackel, currency strategist at ABN Amro, told Reuters.

"Should it happen, it could jeopardise the benchmark status of Treasuries and make it even harder for the U.S. to finance its current account deficit."

Analysts said the Wall Street Journal Europe report hurt the dollar, helping to prod it to the latest in a series of record lows against the euro.

A U.S. bank trader said: "I don't believe there would be a downgrade but the initial reaction was to sell the dollar."

Although ratings agencies indicated that there was nothing in the works to suggest a downgrade, some did not rule out action if U.S. finances continued to deteriorate.

"Nothing is unthinkable, the United States is not the benchmark that some others think it is," Lionel Price, chief economist with Fitch Ratings in London, told Reuters.

He noted that Fitch had downgraded Japan in 1998 and that the United States was put on credit watch in 1995 because the U.S. Congress had been slow to raising the federal debt ceiling.

It was perhaps the most embarrassing story that I have ever read in the WSJ. If the US Govt AAA rating was stripped, the entire credit curve (read world) would go to hell.

Banks all over the world use USG debt, emerging market Brady bonds are backed by USG debt, Municipal bonds, and commercial mortgages are defeased with USG debt. The stuff is everywhere. One of my favorite arguments about not paying off the national debt was the amount of power that you have by being such a large liability to other countries...

What would a AAA rating even mean? Ultimately the US Govt could just print $$ to make it's coupon payments. That would have the effect of devaluing the dollar, and effectively cheapen all USD denominated assets. If they were to strip the USG of it's AAA rating because of this risk, how could any US company get a AAA rating?

That being said, while Europe runs 3%+ budget deficits (with double digit unemployment), China's banking system is on the verge of collapse (their banking system has almost as much bad debt as Japan's, despite it's economy being a fraction of Japan's size), Africa/Latin America/Eastern Europe are basket case economies, Japan still deep in a funk... Just what would be AAA?

They have two quotes from $ Managers -- One from Payden & Rygel, and the other from Bill Gross of PIMCO. From the excerpts below, it is pretty clear that he is likely to be short the market, and long Euro/US credit spreads.

The comments from the agencies appeared a little forced to me, and the story actually gives a fair amount of ammunition agaist it's own headline. I frankly think that it fit the editorial boards current effort to push for a stronger dollar (something that I am in full agreement with BTW). It is too bad that this had to be part of their campaign.

Weak Dollar Aids Eurobond Market -- WSJ 12/06/04
Bill Gross , managing director of Pimco, the giant California bond fund, wrote on his Web site last week that "there's no doubt that the dollar is on the run and that higher U.S. interest rates are the inevitable consequence. Dollar depreciation leads to higher inflation and ultimately forces foreign creditors to question their rationale -- and indeed their sanity -- for continuing purchases of U.S. Treasurys."

The Bush Rally -- Barrons 11/08/04
Bill Gross, the Pimco bond guru, says his investors also want to see more restraint on domestic spending. They fear, he says, that the GOP Congress might be emboldened to spend more on "goodies" for its constituency in the wake of the Democratic defeat.

The Trendy Trade: Sell European, Buy American - 11/22/04
Bill Gross, the chief investment officer at Pimco, said on Wednesday that it was a "perverse day" to be buying Treasuries. "But, yes, we bought some."

Pimco, with $428 billion in assets under management, had "a rather huge position" in German bunds in the five- and 10-year range, which have performed extremely well, and decided to book some profit, explains Gross. In the process, about $2 billion of bunds were sold with the U.S. being the "natural recipient," he adds.

It was largely a defensive move -- "just making sure you don't lose all of it before year end, that type of thing," Gross said

Bonds Hurt by Fear of Foreign Rejection - LA Times - 11/30/04
Bill Gross, who oversees the world's biggest bond fund at Newport Beach-based Pacific Investment Management Co., advised clients in a commentary on the firm's website Monday to be "careful with U.S. Treasuries," saying that a change of heart by foreign investors could be "just around the corner."

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