First U.S. Debt Downgrade to AA from Egan-Jones
(from CNN) Should U.S.A. still be AAA? But Sean Egan, managing director of Egan-Jones Group, a smaller rating agency, questions whether the U.S. still deserves the highest rating. Egan said that despite the pressure that Congress and the federal government can bring to bear on the larger rating agencies in the upcoming financial regulatory reform, he believes the AAA rating will eventually have to be lowered. "It's inevitable that will happen, given the current trends. The government is backstopping everything that is politically relevant and in any kind of difficulty," Egan said.
He added that despite the improving economy and repayment of loans by many major banks, he believes the cost of bailouts is likely to climb. He points to the virtual blank check that the Treasury gave to mortgage finance firms Fannie Mae (FNM, Fortune 500) and Freddie Mac (FRE, Fortune 500) in December.The rescues of Fannie and Freddie have already cost the government $111.6 billion between them and losses are expected to climb on the roughly $5 trillion of mortgages they hold or guarantee.
But Egan said the bigger problem for the U.S. is the cost of entitlement programs and the cost to service the debt once interest rates start to rise from current low levels. That will only become a worse problem if the U.S. does lose its cherished AAA rating. "Once you fall off the AAA pedestal, its' very difficult to get back," Egan said. To top of page
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