Jim Wigen, Sr. Portfolio Manager & Financial Advisor with WHI Financial – Moody’s Backs US’s AAA Rating, S&P Cuts Fannie, Others

Even as Standard & Poor’s began issuing a number of ratings downgrades Monday, as it explores the far-reaching effects of its downgrade of the U.S. credit rating it issued last week, rival ratings agency Moody’s reaffirmed the country’s AAA status.

In his first comments since S&P’s decision, Moody’s analyst Steven Hess sounded a note of caution about Moody’s rating of the U.S., repeating that the Aug. 2 plan to cut deficits by $2.1 trillion was positive for the U.S. credit standing, but not enough to keep its rating on a stable outlook.

Moody’s had earlier put the US on “review for downgrade” on July 13 before removing the ratings watch and affirming the AAA rating on Aug. 2, after the U.S. Congress passed a measure cutting the fiscal deficit and raising the statutory borrowing limit.

“If the process for further deficit reduction that is included in the budget control act produces results that are not really credible, that combined with the economic performance could potentially cause an early move on the rating,” Hess told Reuters in an interview.

Even the $917 billion in savings that have already been agreed by Republicans and Democrats are not guaranteed in the long term, Hess said.

Those savings come mostly from slowing the growth of the discretionary programs that Congress approves annually, covering everything from the military to food inspection.

“One can have doubts about it,” he said. “We certainly believe that it’s credible in the near term but we can have doubts about its enforceability over the long term because future Congress can always change that.”

If the United States manages to keep its AAA rating until the end of 2012, Moody’s will likely take into account how the government will handle the expiration of Bush-era tax cuts to make a decision on the AAA rating, currently under a negative outlook.

Plans from the next administration for additional deficit-reduction measures will also be taken into consideration, Hess said.

Moody’s remarks help stocks move off their lows, but the Dow Jones Industrial Average remained down more than 200 points. In the wake of S&P’s ratings actions and Treasurys rallied.

Further Downgrades from S&P

Meanwhile, S&P downgraded government-sponsored enterprises Fannie Mae and Freddie Mac to AA+ from triple-A, with S&P citing their reliance on U.S. government.

Ten of the country’s 12 Federal Home Loan Banks were also cut to AA-plus. The banks of Chicago and Seattle had already been downgraded earlier to AA+.

Fannie and Freddie own or guarantee about half of all U.S. mortgages, or nearly 31 million home loans worth more than $5 trillion. As part of a nationalized system, they account for nearly all new mortgage loans. Their downgrade might force anyone looking to buy a home to pay higher mortgage rates.

S&P also cut ratings for several of the main arteries of the US financial system—the Depository Trust Co., National Securities Clearing Corp., Fixed Income Clearing Corp. and the Options Clearing Corp.—were cut one notch to AA-plus.

These institutions, previously rated AAA by S&P, clear and process trades and are crucial to the daily workings of the U.S. financial markets.

In issuing the downgrade, S&P explained it was not the result of any company-specific event.

“We have not changed our view of the fundamental soundness of their depository or clearing operations,” S&P said.

S&P said its decisions were based on what it called shifts in the macroeconomic environment and the long-term stability of U.S. capital markets.

S&P gave the four depository and clearing institutions negative outlooks.

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The credit agency now rates 13 states at AAA.

S&P is looking at the impact of the country’s debt consolidation plan agreed on Aug. 2 on the budgets of states and municipalities, David Beers, the head of the agency’s sovereign ratings group, said on Monday.

There is little doubt that S&P will downgrade the six insurers it still rates AAA, including the military-focused insurer USAA and the teacher-centric TIAA. New York Life, one of the six, told Reuters last month it had been told by S&P it could not have a higher credit rating than its sovereign.

Even so, the downgrade is unlikely to affect the six in any substantial way, just as the government’s lower credit rating is unlikely to hurt the insurance industry in general.

“There is no impact on insurer investments in U.S. government and government-related securities from the actions recently taken by the rating agencies,” said Susan Voss, president of the National Association of Insurance Commissioners, in a statement on the NAIC website. “Risk-based capital and asset valuation reserves are unaffected.”

S&P on Friday said that it was downgrading U.S. debt for the first time in history because it lacks confidence that political leaders will make the choices needed to avert a long-term fiscal crisis.

France, Britain Ratings Under Scrutiny

The S&P noted that some of the fiscal indicators in the UK are worse than in the U.S., especially in terms of its debt, but it also doesn’t expect the U.S.’s debt burden to decline. For France, the S&P said it has addressed its long-term entitlement programs effectively and showed the political will to deal with issues.

The S&P expects the debt burden in Germany, the UK and France to peak in a few years and then decline.

It said the U.S.’s political environment was strong, but not as strong as most highly rated governments. It noted elected officials have been unable to put U.S. finances on sustained footing comparable to other triple-A-rated sovereigns.

For the S&P to downgrade the U.S. even further, it said it would need greater fiscal slippage than it anticipates. On the flipside, the possibility of upgrade depends on policymakers showing broader consensus on how to make fiscal policy choices.

The S&P earlier said that it thinks its sovereign ratings are robust and ahead of its rivals, and that it plans to continue that track record. It also noted that printing money doesn’t deliver a triple-A rating.

-Reuters and AP contributed to this story.