This is a guest post by Michael Cembalest, Chairman of Market and Investment Strategy for J.
In August 2011, the United States lost one of its AAA credit ratings, a designation first bestowed around 100 years ago, which when combined with the debt ceiling debate, created one of the sharpest market corrections in post war US history.
Financial markets remain concerned about the ability and willingness of the US and Europe to tackle their respective fiscal challenges.
The Company experienced increases in national advertising across various markets and advertising categories, including financial services, political and retail.
With US federal debt approaching its highest level since the formation of the federal government in 1789 (other than during WWII and its immediate aftermath), rating agencies are taking a close look at rising US debt and what the legislature does to contain it.
The appetite of foreign central banks to accumulate Treasuries has provided the US with a reprieve; these entities, plus Federal Reserve holdings, now account for half of all Treasury bonds.
But monetary policy in Asia and the Middle East is subject to change, and we have seen in Europe the suddenness with which sovereign debt can be re priced by financial markets.
In view of ABI’s stated commitment to the 2.0x net debt to EBITDA leverage target, we view a change in financial policy resulting in such a scenario to be unlikely.
Downgrades, government shutdown rumors and political impasse on deficit reduction have not lost their ability to negatively affect equity markets, business activity and confidence.
This note details 10 reasons why we believe financial markets will take a close look at what Congress does in the year ahead.1.
Assuming that sequestration takes place as planned, the Budget Control Act reduces the trajectory of the debt from the CBO’s explosive Alternative Case, but does not yet set federal debt on a sustainable path.
Even after incorporating all phases of the BCA and assuming expiration of various business and household tax relief provisions, future debt ratios still rise into the mid 80s as a percentage of US GDP.
The CBO Baseline shows a decline in federal debt since it assumes the following three policy options: a sunset of all Bush tax cuts, an end to indexation of AMT to inflation, and reductions to Medicare doctor reimbursements which Congress has agreed to but never enacted.
We anticipate that adjusted FFO to debt will remain above 30% over the medium term, fueled by profitable growth in the group’s regional markets.
, why haven’t monetary or fiscal stimulus multipliers behaved the way their supporters believed they would).
One possible explanation is that fiscal stimulus loses its effectiveness when debt ratios rise too high.
In the chart below, we summarize Ken Rogoff’s findings that when debt ratios in the US and in other advanced economies have exceeded 90%, economic growth suffered notably.
With the US federal debt ceiling now over 100% of GDP (on a gross debt basis) and projections of net debt rising above 80%, financial markets have reason to be concerned.
Supporting Rogoff’s findings is a paper prepared by BIS economists for the Fed’s 2011 Jackson Hole symposium.
In astudy of sovereign, corporate and household debt over the last 3 decades, the authors find that at around 85% of GDP,government debt exerts a significant negative drag on growth.
Jason Murdoch is a business journalist based in Hobart, Australia. Jason has a passion for financial markets and breaking news stories and loves writing about business news, stock market, and economic opinions that matters most to its audience. Jason spends a lot of time discovering and researching latest financial markets and industry news stories in order to make sure the latest and greatest stories are brought to you first on BigBoardNews.com.
