U.S. Downgrade Seen as Upgrade as U.S. Debt Dissolved – Bloomberg 10-09-12

Homeowners, cities and companies are cutting borrowing, undermining the downgrading of the nation’s credit rating.

Total indebtedness – including federal and state governments and consumers – is at 3.29 times GDP, the least since 2006 versus a peak of 3.59 four years ago. Private-sector borrowing is down by $4 trillion to $40.2 trillion.

Reduced borrowing means less competition for US Treasuries. Credit-rating firms are discounting the improvement despite debt, equity and currency markets indicating the U.S. is more creditworthy than before the S&P downgrade in 2011.

Donald Ellenberger at Federated Investors said most people pay little attention to ratings on Treasuries because they are still considered to be risk-free assets, so will continue to be in demand until the perception changes.

US government debt has attracted a record $3.16 in bids for each dollar in 2012 versus the previous record of $3.04 in 2011.

Treasury securities outstanding is a record 71 percent of GDP versus 36 percent five years ago.

 Jim Vogel at FTN Financial said downgrading the U.S. is premature when the two-thirds of American debt that is private is shrinking.

Evans Witt at Princeton Survey Research Associates said a good debate for Romney, a good jobless number for Obama hasn’t fundamentally changed the race.

Zach Pandl at Columbia Management Investment Advisers said you have to look more broadly than simply the debt-to-GDP ratio when assessing the strength of US credit.

Ira Jersey at Credit Suisse said net US taxable debt issuance will fall to $821 billion in 2012, the least since 2000 and less than half the record $2.28 trillion in 2007.

Jeffrey Caughron at Baker Group said the total debt to GDP shows there’s notable improvement since the crisis of 2008.

Moody’s, Fitch Ratings and S&P have a “negative” outlook on the US.

John Piecuch at S&P said there isn’t a plausible scenario for the US to grow its way out of the deficit despite increased revenues from anticipated GDP growth.

Steven Hess at Moody’s said its Aaa rating will probably be cut one level next year unless the government agrees on a plan to reduce the ratio over the medium term.  Hess said as household de-leveraging continues, because consumption is the biggest part of GDP, it’s harder for the federal government to reduce its deficit, to reduce its debt ratio.

Bill Gross at Pimco warned that the US will no longer be the first destination of global capital in search of safe returns unless fiscal spending and debt growth slows. Gross said the U.S. is an addict who frequently pleasures itself with budgetary crystal meth.

David Jacob, former head of structured finance at S&P, said ratings companies are no longer trusted by the world’s biggest investors and grading government bonds is outside ratings companies’ traditional areas of expertise because it involves politicians and not credit risk.