Why Uncle Sam's AAA Credit Rating is Safe -- For Now

Moody's is hinting that rising U.S. debt as a result of increased spending could threaten the nation's invincible credit rating. The credit rating agency dropped the same hint in December. And in March. And in 2009. And, while we're at it, in 1996, when the company placed Treasury bonds on review for possible downgrade.

So before you jump off a bridge, here's the biggest takeaway from the Moody's report, which also raised concerns about mounting debt levels in France, Germany and the U.K.:

"The important message is that in spite of the policy divide between the U.S. and other AAA-rated sovereigns on fiscal austerity and the promotion of growth, the debt metrics are compatible with AAA ratings," Sarah Carlson, vice president- senior analyst in Moody's sovereign-risk group, said by phone.

In other words, while the big European countries are slashing spending and the U.S. is boosting it in order to stimulate their respective economies, they're in no immediate danger of taking a hit to their credit ratings. Underscoring that point, Carlson told Dow Jones that the risk of U.S. borrowing costs rising because of fears about its debt remain "small."

So all Moody's is doing is stating the obvious: The U.S. can't spend at current levels forever. Well, yes.

The lesson of Japan's downgrade, if you can find one
Not that mounting U.S. debt couldn't one day trigger a credit downgrade. Japan lost its AAA rating in 2009, as well as in 2001 and 1998. And of course the mere fear that the U.S. is at risk of a downgrade can rock financial markets and currencies.

Then again, as economist Dean Baker notes, interest rates on Japanese sovereign debt are today very low. That indicates the earlier damage to the country's credit didn't have much long-term impact on the country's ability to borrow.

That's why investors don't appear especially troubled by the warning from Moody's and a similar message today from S&P. Markets, which have a way of pricing in bad economic news, closed flat. Bond yields are low both in the U.S. and in the Eurozone. The cost of credit insurance against the risk of a U.S. default, a barometer of investor fear, also remains modest.

More broadly, are the rating agencies, which aren't exactly known for their spine, really going to brush back America's credit knowing the potential economic repercussions? Not likely.

A worst-case scenario
But what if the unthinkable happened and the U.S. not only saw its credit slashed, but actually defaulted on its debt? Hard to say for sure, but clearly it wouldn't be pretty:

[W]e'd probably see the dollar drop like a stone, as some types of super-conservative investors would be barred by their own rules from investing in U.S. government debt, and many would have to sell their existing holdings. Other currencies around the world would be likely to shoot through the roof.

Long term, the dollar's role as a safe-haven currency that draws in flows in times of stress would be seriously compromised, overturning the way the market has worked for decades.

A plunge in foreign investment also would require even higher U.S. spending, pushing up the deficit. Bond investors would demand higher yields, worsening the government's debt woes. That in turn would entail deep spending cuts and sharp tax increases.

Odds of actual U.S. default --> zero
But let's recall what a credit rating actually is: a measure of the likelihood that a debtor will default. In this light, what are the chances that the U.S. will, at least for the foreseeable future, go bust? Practically zero. That's because if necessary the Treasury Department can always print more dollars. (Yes, that would drive up inflation, but not through the roof.)

You can also be sure that countries like China, the largest foreign holder of U.S. debt with some $904 billion in Treasury bonds, would apply thumbscrews to American policymakers and investors to discourage such a blow-up.

Another factor affecting the debt bomb, obviously, is the health of the U.S. economy. By many measures it's on the mend. A Moody's analyst said just yesterday that "economic recovery has spread across nearly the entire country." And guess what's largely driving the rebound? Government spending (and tax cuts). Federal Reserve Chairman Ben Bernanke also today sounded a note of optimism, saying that the economy is "strengthening" and predicting growth this year of 3-4 percent.

Bottom line: The danger of a U.S. credit downgrade is overblown. The risk of a full-fledged default: Virtually nil.

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Alain Sherter

Alain Sherter covers business and economic affairs for CBSNews.com.

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