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As Washington bails out one financial institution after another, investors have begun to doubt the long-term credit-worthiness of the US itself.
The cost of insuring against default on 10-year US Treasuries jumped to an all-time high of 30 basis points yesterday, as measured by the credit default swaps (CDS) on the derivatives markets. Germany is at 13, and France is 20.
"This is historically significant because we have never seen anything like it before," Daniel Pfaender, sovereign credit strategist at Dresdner Kleinwort.
"What we don't know yet is whether this a liquidity issue or whether it reflects the credibility of the US financial system."
The Federal Deposit Insurance Corporation FDIC has already exhausted half its capital cleaning up after the collapse of IndyMac. It may need half a trillion dollars of fresh money to cope with the 120-odd lenders on its sick list.
Charles Dumas from Lombard Street Research said America's dependency on foreign money would carry a high price. "The ultimate test will be whether this seriously jeopardizes the reserve currency role of the US dollar. China finances the US government. So as long as the Chinese are willing to accept an annual loss of 15pc on their holdings of US bonds in real yuan terms, this can go on, but the decision lies in Beijing. What is clear is that it will take the US decades to pay this off," he said.
Global credit system suffers cardiac arrest on US crash - Telegraph
NEW YORK (Reuters) - Pressure is building on the pristine "AAA" rating of the United States after a federal bailout of American International Group Inc, the chairman of Standard & Poor's sovereign ratings committee said on Wednesday.
The $85 billion bailout of AIG on Tuesday by the U.S. Federal Reserve "has weakened the fiscal profile of the United States," S&P's John Chambers told Reuters in an interview.
"Lack of a pro-active stance could have resulted in further financial stress and put pressure on the U.S. triple-A rating," Chambers said. "There's no God-given gift of a 'AAA' rating, and the U.S. has to earn it like everyone else."
S&P says pressure building on U.S. AAA rating | Reuters
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Monday, August 04, 2008
The ranking Republican on the House Budget Committee said the U.S. government is headed toward bankruptcy if it stays on its current fiscal course.
“We know that for a fact,” Rep. Paul Ryan (R-Wis.)
CNSNews.com - U.S. Headed Toward Bankruptcy, Says Top Budget Committee Republican
The global credit system almost grinds to a halt as yields on US Treasury bills reach zero for the first time since the Great Depression, writes Ambrose Evans-Pritchard
Albert Edwards, global strategist at Société Générale, said Washington's serial bail-outs are the inevitable result of the credit bubble of preceding years. "This was all baked in the cake long ago. What we have seen so far is just a dress rehearsal for the deep recession that is coming. America is going to be losing 500,000 jobs a months. That is when we will see interest rates go to zero. The deficit will be covered with printed money as it was in Japan. The endgame will be helicopters full of cash dropped by Ben Bernanke," he said.
Global credit system suffers cardiac arrest on US crash - Telegraph
WASHINGTON -- The Congressional Budget Office said the U.S. budget deficit for fiscal 2008 -- $407 billion -- will be more than double the deficit for 2007, hit by the wars and a weak economy, and predicted it is likely to rise further in fiscal 2009.
The fiscal 2008 budget deficit will rise to 2.9% of gross domestic product this year, according to the agency, up from 1.2% of GDP in 2007. The fiscal 2007 deficit was $161 billion.
Since March, the CBO has increased its estimate of the fiscal 2008 deficit by $51 billion. The agency's report said the increase came as a result of supplemental spending for wars in Iraq and Afghanistan, as well as additional funding for deposit insurance and unemployment payments.
The CBO in March estimated a $207 billion deficit for fiscal 2009, less than half the estimate in its report Tuesday. The report said updated baseline numbers assumed more supplemental spending for Iraq and Afghanistan, as well as higher inflation and lower economic growth over the long haul.
WASHINGTON (AFP) — The US current account deficit widened to 183.1 billion dollars in the second quarter of 2008
Budget Deficit Likely Doubled for Fiscal '08 - WSJ.com