Credit Agency: U.S. Debt Rating at Risk

(AP)  The United States and Britain are more likely than Germany and France to witness an embarrassing downgrade of their top debt rating, agency Moody's Investors Service said Monday.

In a quarterly report assessing the prospects of the triple A-rated countries, including Spain and the "less fiscally challenged" Denmark, Finland, Norway and Sweden, Moody's warned that the economic recovery remained fragile in many advanced economies.

"This exposes governments to substantial execution risk in the implementation of their exit strategies, which could yet make their credit more vulnerable," says Arnaud Mares, senior vice president in Moody's sovereign risk group and the main author of the report.

Governments and central banks are looking at when and how to unwind their massive stimulus measures, which include historically-low interest rates, liquidity provisions, industry incentives and increased spending. Although some experts warn that exiting these policies too early risks creating a new economic downturn, they are also straining government finances.

Watch 60 Minutes: Inside Wall Street's Collapse

For now though, Moody's said the triple A governments don't face an immediate threat to their top ratings as the servicing of the debt remains manageable - the top credit rating reduces the interest payments countries have to pay on their debt when going to the bond markets to raise capital.

However, debt affordability is "most stretched" in Britain and the U.S., Moody's said.

In light of the muted recovery from recession in many countries, Moody's said government action on spending and taxes is the main way of "repairing the damage" that the global crisis inflicted on government finances.

Moody's said triple A governments also face a "delicate balancing act" with respect to the timing of these adjustment and that tightening fiscal policy before the recovery has become self-sustainable could risk undermining the recovery, thereby damaging governments' power to tax. However, it warned that postponing fiscal consolidation much longer is "no less risky as it would test the patience of the market" and could force central banks to take the initiative.

"At the current elevated levels of debt, rising interest rates could quickly compound an already complicated debt equation, with more abrupt rating consequences a possibility," said Pierre Cailleteau, managing director of Moody's sovereign risk group.

The debate about when to start cutting spending is likely to be at the heart of the general election campaign in Britain, which is expected to formally kick off in the next few weeks - most commentators think that Prime Minister Gordon Brown will call an election for May 6 early next month.

While Brown's governing Labour Party is arguing that spending cuts should not be sanctioned until the recovery from recession is on a surer footing, the main opposition Conservative Party says it's imperative that the government gets a grip on debt soon to shore up market support.

Economists warn that Britain is on course to borrow the equivalent of 12.8 percent of gross domestic product in 2009/10 - exceeding the 12.7 percent forecast in crisis-hit Greece and far above the average 6 percent for Europe.

In the U.S., the budget deficit this year is projected to be just under 10 percent of the economy, meaning that the Treasury has to sell more and more bills to fund the shortfall.

One country that got a thumbs-up from Moody's was Spain.

It said that it was the first triple A government to rise to the challenge when faced with meaningful market pressure to announce such measures, although its adjustment process will "undoubtedly be drawn out and painful."

Other large Aaa governments are not immune to facing the same pressure in the coming months, Moody's warned.

[hateisafourletterword]

Moody's obviously has not had the visit in the shower by Rahm yet. Once that is over, USA will have AAAA credit, not just AAA, but even higher credit - until a republican is president anyway at which point take it to B rating and blame Bush.

[rightbehind]

Where were these clowns when bush and reagan fired the presses up and were running them at full throttle? This is a joke and not even worthy of print. They're trying to use psychology on the weak minded conservatives. I would laugh but there are idiots that will fall for and believe this.

[rightbehind]

This is a joke. The United States being judged by a credit agency. The results of almost 30 years of republican ideology. It's time to end the race to the bottom. We should start by closing the door behind this credit agency. It's hard to believe that people will actually fall for this and believe it. If you want your country back the first thing you need to do is throw as many republicans out of office as the ballots hold. Then let's see what that credit agency has to say.

[bandolph]

Moody's for the love of god...these are the same creeps who needed bail out money to stay alive...these are the creeps who were supposed to warn us about WALL STREET's financial state.
Now they want to tell us that the Government that saved their butts and Wall street's is unsound!!

[rightbehind]

If the US government wants to improve its credit rating they could start by dragging those most desired former enron employees out in leg irons that morgan stanley and goldman sachs hired. The same speculators that caused rolling blackouts in California and drove gas to 4 dollars a gallon. Drag them out!

[hateisafourletterword]

rightbehind - this is serious and not something to joke about OK? You want to treat it as a one party problem or one industry problem is absurd. So please comprehend that you need to blame all politicians!

[pragmatist1]

We can just keep printing phony money like the Germans did in the thirties. A bushel barrel full of money just to pay for a loaf of bread that made out of mostly sawdust. We're spending too much money - more than we're taking it. Time to slash all programs that benefit those that aren't putting in and doing their fair share, especially illegal aliens. And please don't bring up the trash about bailed out Wall St. entities, most of which have paid back the loans and with interest. At least they've paid back their loans.

[curse914]

I was not going to bother to comment further, but after hearing pundit after pundit attack Obama for the bank levy and Glass Steagal 'lite', after banks allegedly paid their dues... I just couldn't take it anymore.

Yes! Obama has made a lot of policy errors in dealing with the banks. Yes! I believe he has not solved the problems, but has chased the symptoms. The separation of prop trading from deposit banking IS the RIGHT thing to do. In addition, the banks have not come anywhere NEAR repaying their debt to the government. Not even close.

Yes, some of the banks repaid TARP, with interest and warrants. Okay. The investment big banks (that were still in existence) were offered expedited financial holding company (bank) charters. That is why they didn't fail, at least in part.

So, running down the list, the banks paid back TARP. That's a +, but....

1. What was the value for bank charter, to get cheap access to the Fed's funds? did they pay back this value yet? No!
2. How about the payment of interest on the banks' excess reserves at the Fed. Have the banks repaid that yet? No!
3. The Fed and the Treasury have purchased hundreds of billions of dollars of Agency debt, Agency mortgage-backed securities (MBS) and related securities through Treasury purchase programs. Have the banks paid back the capital behind those purchases yet? No!
4. How about the Term Auction Facility? Has the capital behind the benefits of that program been paid back? No!
5. Then there is the Primary Dealer Credit Facility (PDCF), has this been paid back? No!
6. Do you remember the Term Asset-Backed Securities Loan Facility (TALF)? Have the funds behind that been paid back? No!
7. What about the PPIP? No!
8. Hey, there's the Foreign Exchange Swap programs (the currency swap lines, that saved not only our banks but out banks facing counterparties who were short on dollars), has that been paid back? No!
9. There's the Commercial Paper Funding Facility (CPFF), have the funds behind that been paid back? No!
10. Most importantly, the opportunity cost of ZIRP, which hurts those who do not speculate (or have not speculated) with near free money! How do you pay that back to grandma and her .017% CDs?

[rightbehind]

Let's see I can buy a loaf of bread or pay off my house! Print the money! I'll plant a victory garden! As for wallstreet they basically set a fire the US government put out and now they should be congratulated because they paid back the cost of putting the fire out. They should board up wallstreet!

[rightbehind]

What we need to do is lock the borders down and shut the door behind every business that off shored manufacturing to take advantage of desperation in third world countries. The new rule should be if you want to sell it here it has to be made here or get taxed. That works for all countries and will stop the neocons from taking advantage of desperation and undermining economies.

[tsigili]

That's what happens, when you take the spendthrift approach, in government.

At least that is discouraging China from retaining all the US debt they have been carrying, which is good from the standpoint, that they may not take over the country, by default.

Obama is wrecking the financial condition of the country, with his spendthrift ways, and he either must get his ways under control, or the GOP will do it for him, in November.

[U_S_Drug_Addict]

Republicans dont tax and spend, they just spend and spend...

[x684867]

With all due respect SoCalSuperSage, you are inaccurate, uninformed and a shining example of why our nation is experiencing this problem. The Obama administration is not to blame for the possible downgrade of American credit rating. You AND I are responsible. WE have engaged in poor fiscal practices for DECADES and must now pay the consequences. We as Americans have historically elected idiots to office, including George W. Bush (who outspent Clinton) and William Jefferson Clinton (who outspent the first Bush) and so on all the way back to FDR.

Own up to the problem, people. This is not the fault of the politicians. They have done what we have asked for decades and given us a free ride! Now we have to pay that tab, as predicted by economists for decades.

[jackp32]

Now, it matters not who is at fault but what will be done and by whom to get the U.S. back on firm financial footing. I'm still waiting for a plan from our politicians and our President.

[hateisafourletterword]

Great post X.

This problem has been growing for decades. As long as we continue to elect the people we do, we have no chance. Both parties have failed us.

Stop all new spending bills NOW and until Congress can come up with a viable plan to paydown the U.S. debt, we must stop spending.

[book_of_wally]

Moodys? No problem. Just slip them cash like Wall Street did during the Bush administration. Their ratings are for sale.

[edgy44]

Moody's has been paid off since day 1. Bush was just a customer.

[vuenbelvue]

There is always the old fashion way for the US. Cut spending and reduce salaries and wages and maybe hours of all the employees. No Department should escape spending cuts. Cut foreign aid and foreign military bases. That would be a sin though. Maybe President Obama needs to spend time in state capitals and see what the governors are doing instead of going to Australia. Or if he goes to Australia ask them how they do their healthcare and how they project themselves in the world thru their federal budget spending. Time for change in Post 2008.