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Moody’s: US, UK Closer To Losing Rating

From Bloomberg:

U.S., U.K. Move Closer to Losing Rating, Moody’s Says

By Matthew Brown

March 15 (Bloomberg) — The U.S. and the U.K. have moved “substantially” closer to losing their AAA credit ratings as the cost of servicing their debt rose, according to Moody’s Investors Service.

The governments of the two economies must balance bringing down their debt burdens without damaging growth by removing fiscal stimulus too quickly, Pierre Cailleteau, managing director of sovereign risk at Moody’s in London, said in a telephone interview.

Under the ratings company’s so-called baseline scenario, the U.S. will spend more on debt service as a percentage of revenue this year than any other top-rated country except the U.K., and will be the biggest spender from 2011 to 2013, Moody’s said today in a report.

“We expect the situation to further deteriorate in terms of the key ratings metrics before they start stabilizing,” Cailleteau said. “This story is not going to stop at the end of the year. There is inertia in the deterioration of credit metrics.”

The pound fell against the dollar and the euro for the first time in three days, depreciating 0.8 percent to $1.5090, while the dollar index snapped a four-day drop, adding 0.3 percent to 90.075.

The U.S. government will spend about 7 percent of its revenue servicing debt in 2010 and almost 11 percent in 2013, according to the baseline scenario of moderate economic recovery, fiscal adjustments in line with government plans and a gradual increase in interest rates, Moody’s said.

Under its adverse scenario, which assumes 0.5 percent lower growth each year, less fiscal adjustment and a stronger interest-rate shock, the U.S. will be paying about 15 percent of revenue in interest payments, more than the 14 percent limit that would lead to a downgrade to AA, Moody’s said.

The U.K. is likely to spend 7 percent of revenue servicing debt this year and 9 percent in 2013, rising to almost 12 percent under the adverse scenario, Moody’s said.

Financing costs above 10 percent put countries outside of the AAA category into a so-called debt reversibility band, the size of which depends on the ability and willingness of nations to reduce their debt burden by raising taxes or reducing spending. The U.S. has a 4 percentage-point band, while the U.K. has a 3 percentage-point band.

“Those economies have been caught in a crisis while they are highly leveraged,” Cailleteau said, referring to the level of private and public debt as a percentage of gross domestic product. “They have to make the required adjustment to stabilize markets without choking off growth.”

The U.S. would be the “most affected” under the adverse scenario, as the only country that would face a downgrade, Cailleteau said. The company’s baseline scenario assumes that all current AAA sovereigns will keep their ratings over the next three years, he said…

“On balance, we believe that the ratings of all large Aaa governments remain well positioned, although their ‘distance-to- downgrade’ has in all cases substantially diminished,” Moody’s said in the report.

None of the current Aaa rated countries are likely to lose their ratings, said Peter Chatwell, a fixed-income strategist at Credit Agricole CIB in London.

“This report is a warning shot to governments, setting out the line that they can’t cross with their budgets,” he said.

While the U.S. is likely to benefit from economic growth more than other AAA nations, weak public consumption is likely to weigh on GDP this year, the ratings company said.

“The pattern of growth and the high rate of unemployment raise the question of how strong the recovery will be going forward,” Moody’s said. “The ability of the U.S. economy to grow more rapidly and, therefore, for government revenues to contribute to fiscal consolidation, will have to depend on a revival in the growth of consumption.”

The U.S. economy will grow 3 percent this year and in 2011 after contracting 2.4 percent in 2009, according to the median estimate of economist forecasts compiled by Bloomberg. Unemployment will average 9.6 percent this year, up from 5.8 percent in 2008, and will fall to 9 percent next year, based on the median estimate…

How wonderful. 9% unemployment for the foreseeable future.

Achieving the fiscal consolidation necessary to avert a downgrade will test “social cohesion” and may involve rewriting the “social contract” between governments and their people, Cailleteau said. “People have to decide what level of pain they are willing to accept to have a healthy economy.” …

Funny how we never hear any mention of Mr. Obama’s ‘healthcare reform’ in relation to how it will further drive up our national debt and further erode our financial rating.

Why is that?

This article was posted by Steve on Monday, March 15th, 2010. Comments are currently closed.

4 Responses to “Moody’s: US, UK Closer To Losing Rating”

  1. MO says:

    The shell game that is the financial system is closing in on a day of reckoning. At the end of the day, money will be green paper, and gold a metal you can’t eat. The economic illliterates in Congress have no clue about the damage they are doing. This reads like a novel I read 10 years ago called A Distant Crossing, base on a monetary meltdown. Fiction is now reality.

    • Liberals Demise says:

      We now have the Taliban pulling our purse apart from the inside.

      Thanks dingleBarry!!

  2. GetBackJack says:

    Well, shucks. The USA is way behind it’s financial stalwarts on Wall Street. You’re supposed to BUY your rating, you dingbats.

    Man, Barry Otero don’t know nothing about nothing, do he?

  3. Mithrandir says:

    When will this Ponzi scheme finally run out of gas? There is a lot of money out there to be had, the government just has to shake the tree harder.

    Man ‘o man have governments caused more misery, death, and strife in the lives of humans than we can ever calculate. Not only the wars governments start, and finish, but the micromanaging, mismanaging, abuse of rights, and over taxation of its own citizens who want nothing more than to support a GOOD government and be left alone.

    It makes you wonder if those hand-to-mouth goat herders in Afghanistan, with no powerful centralized government are living more free than the Americans are? (yes they are)

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