July 18, 2011American Government-Endorsed Rating Agency Downgrades U.S. Credit
Moody's and Standard & Poors are the largest, best known rating agencies which are endorsed by the U.S. government (technically known as Nationally Recognized Statistical Rating Organization (NRSRO). Fitch is another well-known NRSRO.
But there are actually 10 NRSRO's:
Kroll Bond Rating Agency
Moody's Investor Service
Standard & Poor's
Fitch Ratings
A. M. Best Company
Dominion Bond Rating Service, Ltd
Japan Credit Rating Agency, Ltd.
R&I Inc. (Rating and Investment Information, Inc.)
Egan-Jones Rating Company
Realpoint LLC
Egan-Jones Downgrades U.S.
Standard & Poors has recently threatened to downgrade U.S. credit even if there is no debt default.
As Zero Hedge notes, Egan-Jones has just downgraded U.S. credit, for reasons other than the debt ceiling debate:
The one truly independent and capable NRSRO, Egan-Jones, downgraded the US from AAA to AA+ over the weekend.
From the release:
Real GDP increased at an annualized rate of 4.0% in Q1 2011, following an increase of 3.5% rise in the prior quarter. Personal consumption expenditures, exports, and nonresidential fixed investment contributed positively to growth during the quarter. Meanwhile, imports rose sharply. In the March 2011 quarter, trade in goods and services resulted in a deficit of $562B, many because of the high price of petroleum.
However, the major factor driving credit quality is the relatively high level of debt and the difficulty in significantly cutting spending. 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.
And while there is much more in the full report (mind you nothing of it is surprising to anyone), the post script is spot on:
Nota Bene [Latin for "Note Well"]
History has proven that defaults on domestic public debt do occur. In fact, seventy out of three hundred twenty defaults since 1800 have been on domestic public debt (1). 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.
While the mainstream media will not pay much attention to Egan-Jones, the downgrade is another indication that the debt ceiling debate is a melodrama distracting from the deeper issues.
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A Nationally Recognized Statistical Rating Organization (NRSRO) is a credit rating agency (CRA) that issues credit ratings that the U.S. Securities and Exchange Commission (SEC) permits other financial firms to use for certain regulatory purposes.
Originally, seven rating agencies were recognized as NRSROs, a number that dwindled as a result of mergers to six by the mid-1990s and then to three by 2003.[2] As of April 2011, ten organizations were designated as NRSROs.
Ratings by NRSROs are used for a variety of regulatory purposes in the United States. In addition to net capital requirements (described in more detail below), the SEC permits certain bond issuers to use a shorter prospectus form when issuing bonds if the issuer is older, has issued bonds before, and has a credit rating above a certain level.
SEC regulations also require that money market funds (mutual funds that mimic the safety and liquidity of a bank savings deposit, but without Federal Deposit Insurance Corporation insurance) comprise only securities with a very high rating from an NRSRO. Likewise, insurance regulators use credit ratings from NRSROs to ascertain the strength of the reserves held by insurance companies.
