April 6, 2012 / 2:35 PM / 7 years ago

Egan-Jones cuts U.S. rating on debt burden

NEW YORK, April 6 (Reuters) - Egan-Jones Ratings downgraded the credit level of the United States as Washington has struggled to reduce the federal debt burden, which is projected to surpass the size of the country’s economy.

The independent rating firm, which issued the downgrade late Thursday, said its senior debt rating on the United States is now AA, its third highest rating, down one notch from AA-plus.

It also maintained a negative watch on the world’s biggest economy as the federal debt load could rise to $16.7 trillion at the end of 2012. U.S. gross domestic product, in the meantime, could grow to $15.7 trillion, assuming it would grow at a rate of 2.5 percent, the firm said.

The firm downgraded the United States for second time in less than nine months “because of the lack of any tangible progress on addressing the problems and the continued rise in debt to GDP,” said Sean Egan, co-founder of firm, in an e-mail statement.

Egan-Jones’s downgrade did not elicit major market responses. U.S. government debt prices jumped on Friday after news of much weaker-than-expected job growth in March renewed bets the U.S. central bank would embark on more bond purchases to foster economic growth.

Back in mid-July, Egan-Jones stripped the United States’ of its top AAA-rating amid the debt ceiling fight in Washington that stoked fears of a federal default.

The three larger rating agencies, however, currently have higher ratings on the United States than Egan-Jones.

Moody’s Investors Service and Fitch Ratings still rate the United States with their highest credit grade of AAA, although Moody’s has said it could strip the country of its top rating.

In August Standard & Poor’s stripped the United States of its AAA rating, knocking it by a notch to AA-plus. It warned of a possible further downgrade.

Efforts to contain federal spending and borrowing have been unsuccessful. A congressional “Super Committee” seeking spending cuts of $1.5 trillion over 10 years, equal to $150 billion annually, “was a failure,” Egan-Jones said in its report.

“Obviously, the current course is not enhancing credit quality. Without some structural changes soon, restoring credit quality will become increasingly difficult,” it said.

While the rock-bottom interest-rate climate, a result of the Federal Reserve’s ultra-loose policies, has helped the United States to finance its federal debt, it could run into trouble once its borrowing costs rise and the government does not reduce its debt load, Egan said.

The Fed has clung to a near-zero interest rate policy since December 2008. It has also purchased more than $1 trillion worth of Treasuries securities over the past three years, stemming from its emergency measures to lower mortgage rates and other long-term borrowing costs to stimulate borrowing and investment.

“Monetizing the debt depresses interest rates in the short run but does not address underlying credit quality as manifested by the rapid rise in debt to GDP,” Egan said.

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