“You ain’t a beauty, but hey you’re alright.” The rating agencies chimed in last night in response to the lack of a deficit reduction deal and all reaffirmed their ratings. Fitch though said they will likely revise the outlook to negative next week. Moody’s said “failure to reach an agreement would not by itself lead to a rating change.” S&P said the lack of a deal was consistent with their downgrade months ago to AA+ and in order to keep that rating, they said “we expect the caps on discretionary spending as laid out in Budget Control Act of 2011 to remain in force.” I’ll say this again as it’s not rocket science, it’s simple math and a dose of honesty: the growth rate of the country’s debts and deficits are driven mostly by Medicare, Medicaid and Social Security and any deal that doesn’t PERMANENTLY change the spending trajectory of them will not matter to the overall numbers. Tweaking tax rates and discretionary spending are red herrings based on math, not ideology. On defense spending, do we really need a military presence in 150+ countries? Ok, I’m done with this political discussion as I’ll say bluntly, I don’t like politicians. In Europe, Spain sold 3 month bills at a yield of 5.11% vs 2.29% yield paid last month and compares with a US 3 mo bill yield of .01%. Spain had to pay 5.23% to sell 6 month bills vs 3.30% last month. The US pays .05%. The euro basis swap is narrower by 5 bps but US$ 3 mo LIBOR reached .50%. As we celebrate Thanksgiving on Thursday, Merkel, Sarkozy and Monti will have lunch together as all eyes focus on the new governments in Italy and Spain and Germany wants the ECB to not be further dragged into the bailout game.
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