After the warning bell was sounded about the U.K.'s credit worthiness Thursday, concern turned to what might happen to the United States' credit rating, which is AAA. Treasury Secretary Timothy Geithner made it clear there is no immediate concern for the U.S. during an interview with Bloomberg Television yesterday.
While it was reported on Thursday that the U.K.'s debt level was nearing 100 percent of GDP, U.S. deficit is projected to be 12.9 percent of GDP this year, significantly lower than U.K.'s position. Geithner told Bloomberg, "It's very important that this Congress and this president put in place policies that will bring those deficits down to a sustainable level over the medium term." Geithner said his target is reducing the gap to 3 percent of GDP.
Bill Gross, the chief investment officer of Pacific Investment Management, told Bloomberg the U.S. "eventually" will lose its AAA grade. He added that a U.S. sovereign rating cut is "certainly nothing that's going to happen overnight," but he thinks financial markets are "beginning to anticipate the possibility."
The 10-year treasury benchmark yield jumped 17 basis points to 3.36 yesterday after the story about the U.K. broke. The S&P 500 stock index lost 1.7 percent yesterday and the dollar fell 0.5 percent Friday to $1.3949 per euro after a 0.8 percent drop Thursday.
Geithner expects the deficit to drop to 8.5 percent of GDP next year, as shown in his latest budget request. Projections are that the deficit will drop to 6 percent of GDP in 2011 and fluctuate between 2.7 and 3.4 percent between 2012 and 2019. But Geithner also expects things could get worse before we start seeing an economic recovery. He said it's still possible unemployment could reach 10 percent or higher.
He told Bloomberg, "The important thing to recognize is that growth will stabilize and start to increase first before unemployment peaks and starts to come down." He think that while we're seeing "early signs of stability," it's "still a very challenging period for businesses and families across the United States."
Lita Epstein has written more than 25 books, including the Complete Idiot's Guide to Foreign Currency Trading.
Geithner has no immediate concern for U.S. creditworthiness