U.S. downgrade seen as upgrade as $4 trillion debt dissolved

Growth Forecasts

While economic growth is forecast to slow to 2.1 percent in 2013 from 2.2 percent this year, that would still be better 0.5 percent contraction in the euro area, the 1.2 expansion in Japan and the U.K.’s 1.2 percent growth, separate surveys of economists by Bloomberg show.

When assessing the strength of U.S. credit, “you have to look more broadly than simply the debt-to-GDP ratio,” Zach Pandl, the Minneapolis-based senior interest-rate strategist at Columbia Management Investment Advisers LLC, said Oct. 1 in a telephone interview. The firm oversees about $166 billion in fixed-income assets.

Bloomberg compiled quarterly data on federal, non-financial corporate, financial company, state and local government and household borrowing from the New York Fed and Washington-based Fed and compared that with year-end figures earlier than 2011. The gross-domestic-product data is from the Bureau of Economic Analysis.

Declining Debt

Consumer debt declined to $11.4 trillion at the end of the second quarter, from a peak of $12.7 trillion in 2008. The market for commercial paper, a form of short-term corporate IOUs, has shrunk to $975 billion from a record $2.22 trillion in July 2007, central bank data show.

Net U.S. taxable debt issuance, which includes corporate, mortgage and Treasury securities, is forecast to fall to $821 billion in 2012, the least since 2000 and less than half the record $2.28 trillion in 2007, according to Ira Jersey, an interest-rate strategist at Credit Suisse Group AG in New York. The firm is one of 21 primary dealers that trade directly with the Fed and is obligated to bid at Treasury auctions.

‘Notable Improvement’

“All you have to do is look at the total debt to GDP to see that there’s notable improvement since the crisis of 2008,” Jeffrey Caughron, an associate partner at Baker Group LP in Oklahoma City, said Oct. 3 in a telephone interview. The firm advises community banks on investments exceeding $42 billion.

S&P cited political risks and the worsening “likelihood that Congress and the Administration will agree upon a credible, medium-term fiscal consolidation plan in the foreseeable future” when it downgraded the U.S.

After the Treasury Department said S&P made a $2 trillion error in its calculations, the ratings company switched the budget projections it was using and proceeded with the downgrade. S&P denied it made a mistake and said using the government’s preferred fiscal scenario didn’t affect the credit rating.

Moody’s and Fitch Ratings give the U.S. their top rankings. Like S&P, the firms have a “negative” outlook on the U.S.

Private-sector debt is considered in S&P’s economic and external indebtedness scores, which are among the five factors it uses to consider a nation’s creditworthiness. S&P’s calculation of its sovereign debt-to-GDP ratio includes state- and local-government debt, according to the company’s rating criteria.

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