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S&P Is 'Dead Wrong' About US Debt: Pro

CNBC.com
Thursday, 9 Jun 2011 | 12:21 AM ET

Despite grave warnings by rating agencies about the United States' debt problems, not all financial experts feel the same. Jay Feuerstein, chief executive officer of investment company 2100 Xenon, says the agencies are "dead wrong".

Liquidity is Key
Jay Feuerstein, CEO and CIO of 2100 Xenon says as long as the Fed ensures liquidity in the system, the U.S. economy and markets don't necessarily need more quantitative easing.

"I don't think the U.S. is going to default on its debt," Feuerstein told CNBC on Thursday. "It has to make its payments, and it certainly has the wherewithal to make its payments."

Although the U.S. government debt has swelled in the two decades since the government's Savings and Loans (S&L) crisis of the late '80s early '90s, Feuerstein noted that interest rates are so low today that it costs just a fraction to carry the debt load, compared to the past.

"In 1988, the average interest cost of a dollar of U.S. Treasury debt was a whopping 9 percent. Today, it is a mere 2 percent," he said

Total expenditure for interest payments today stands at $370 billion, he highlighted, not far from the $320 billion back then. But the nation's GDP has since more than tripled to $14 trillion. Interest expense was roughly 4.23 percent of GDP in 1988, according to U.S. Treasury data. That number has been declining, and is closer to 2.8 percent today.

"Our ability to pay and our cost, our financing, on a relative basis, relative to GDP is very small," Feuerstein said.

On Wednesday, Fitch ratings agency warned it could slash the U.S. sovereign ratings if the country missed bond payments. The comments come a month after a similar warning from Standard and Poor's, which said the U.S. prized AAA rating had a 1 in 3 chance of being cut in the next 2 years if America did not get its fiscal house in order.

Feuerstein, a market veteran of more than 30 years, said S&P's view was simply not grounded and was, in fact, "irresponsible".

Even in a situation where interest rates were to readjust, Feuerstein thinks the U.S. is well-hedged as its portfolio of assets is now more diversified.

"Besides traditional bonds, the Treasury now issues Treasury Inflation Protected Securities (TIPS), which balance the interest rate risk of the United States, he said. "The interest rate on TIPS moves inversely to traditional debt securities so the Treasury can diversify borrowing risk and better manage its interest rate risk."

Despite news of China, the world's largest foreign holder of U.S. Treasurys, trimming its holdings of U.S. debt for the fifth straight month to $1.145 trillion in May, Feuerstein says demand for U.S. debt continues to be surprisingly strong, with sovereign purchases of American debt at its highest level in both the raw dollar amount and in terms of the percentage of assets held in other countries.

"By putting the U.S. on negative watch, S&P is clearly trying to make up for its past sins," he said. "We all know that leading up to the global financial crisis, ratings agencies such as Moody's and S&P issued troves of AAA ratings to structured debt products which ultimately turned out to be worthless."

"S&P missed the mark then and is now trying to redeem itself," he said.

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