Ratings agency Egan-Jones has downgraded its credit rating for US debt one level — to AA- from AA — the Associated Press reports.
According to Bloomberg, Egan-Jones cited “the potential for the Federal Reserve’s third round of large-scale asset purchases to weaken the dollar and drive up inflation,” without significantly raising the country’s real gross domestic product.
“From 2006 to present,” the ratings agency said in a note, “the US’s debt to GDP rose from 66% to 104% and will probably rise to 110% a year from today under current circumstances; the annual budget deficit is 8%.”
“In comparison, Spain has a debt to GDP of 68.5% and an annual budget deficit of 8.5%.”
According to CNBC, in April Egan-Jones cut its U.S. credit rating from AA to AA+ “with a negative watch.” Back then, the reason given was failure to move toward deficit reduction.
Founded in 1995, Philadelphia-based Egan-Jones is a Nationally Recognized Statistical Rating Organization, accredited by the Securities and Exchange Commission since 2007. NRSRO status means that the SEC considers an agency “‘nationally recognized’ in the United States as an issuer of credible and reliable ratings by the predominant users of securities ratings” (in the words of guidelines proposed in March 2005, since superseded). Other NRSROs include the better-known Moody’s (MCO), Standard Poor’s and Fitch Ratings.
Egan-Jones was the first NRSRO to downgrade the United States, dropping the country’s sovereign debt from AAA to AA+ on July 16, 2011. “The major factor driving credit quality is the relatively high level of debt and the difficulty in significantly cutting spending,” the firm said at the time.
SP soon followed Egan-Jones’s lead, cutting its U.S. credit rating from AAA to AA+ on August 5, 2011; Moody’s and Fitch changed their outlooks to negative in June and November, respectively, though both kept their ratings at triple-A.
Egan-Jones was also the first to downgrade Enron and WorldCom, two of corporate history’s most notorious failures.
Unlike its larger peers in the credit-rating business, which are compensated by Wall Street companies that issue securities, Egan-Jones is paid by investors. The firm touts this investor-supported structure as a means of avoiding conflicts of interest, which plagued the industry in the run-up to the 2008 financial crisis, when highly dubious securities being peddled by investment banks were often granted triple-A status.
According to the AP, Egan-Jones founder and president Sean Egan “has long railed against the power of the three major ratings agencies.”
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