Author Archives: Norm Leahy

As I noted several weeks ago, if the federal government’s AAA rating is cut owing to skittishness over the debt ceiling, Virginia’s AAA rating could suffer as well. And now, Moody’s has made the possibility of such a downgrade quite clear:

— Moody’s Investors Service has placed on review for possible downgrade the Aaa ratings of the states of Maryland, New Mexico, South Carolina, Tennessee, and the Commonwealth of Virginia. In connection with Moody’s July 13 action placing the Aaa government bond rating of the United States on review for downgrade, Moody’s announced that it would assess the ratings of Aaa-rated states to gauge their sensitivity to sovereign risk. The review actions affect a combined $24 billion of general obligations and related debt.

Other states Moody’s rates as AAA aren’t on the list. So why Virginia, but not, say Alaska or North Carolina? I’ll let the bullet points do the talking:

• Sensitivity to national economic trends compared to other Aaa-rated states based on Moody’s Economy.com measure of employment volatility due to U.S. fluctuations: Above average

• Federal employees as a percentage of the state’s total employment: Above average

• Capital markets risk: Low due to a small amount of puttable variable rate debt outstanding

• Federal procurement contracts as a percentage of state gross domestic product: Above average

• Medicaid as a percentage of total expenditures: Below average

• Available fund balance as a percentage of operating revenue: Below average

While the ratings agency makes it clear that any downgrade of state debt like Virginia’s would be on a case-by-case basis, the points above still ought to be quite sobering for those who believe that Virginia — business friendly, well-managed commonwealth that it may be — controls its own fate. It does not.

Ultimately, it’s the fate of our impoverished Uncle on the Potomac that decides. Remember that as the resident political class beats its breast over its already spent budget surplus.

— Norm Leahy

(Cross posted at Score Radio Network)

by Norm Leahy

A less well-known ratings agency, Egan-Jones, has downgraded the federal government’s debt from AAA to AA+. The report explaining why can be found here. If you’re not a client, Zero Hedge has the press release, complete with charts, which gives you a solid understanding of the report’s contents:

We are taking a negative action not based on the delay in raising the debt ceiling but rather our concern about the high level of debt to GDP in excess of 100% compared to Canada’s 35%. Nonetheless, since the US’s debt is denominated in dollars, a hard default is unlikely.

So the mummery behind the debt ceiling talks has little to do with the government’s fundamentals, which are only getting worse. This additional item is worth remembering as doomsday (or at least doomsday as it is preached in the press) approaches:

Egan-Jones does not view a country’s ability to print its own currency as a guarantee against default. Additionally, Egan-Jones generally views cases of excessive currency devaluation as a de facto default.

Based upon that last bit, one could argue that the Federal Reserve’s mass printing of money over the last several years has effectively rendered the United States a larger version of Zimbabwe.

(Cross posted at Score Radio Network)