Moody’s Cautions that U.S. Debt Might Harm Triple-A Rating
The superb credit rating of the United States—something America and most of the world has taken for granted—could be in jeopardy in coming years as the country’s debt explodes.
That grim assessment, which Moody’s Investors Service issued on Monday, offered a reminder that even United States Treasury bonds, allegedly the safest investments, could be downgraded from their AAA rating eventually if politicians do not bring the federal debt under control.
Moody’s reported that the U.S. and other large Western countries, especially Great Britain, have come “substantially” closer to having their gilt-edged credit ratings drop. Although the ratings are “stable,” their “‘distance-to-downgrade’ has in all cases substantially diminished,” Moody’s said.
The Effects of a Downgrade
Pride isn’t the only thing a downgrade would harm. The biggest consequence would be the nation’s possible inability to continue borrowing money on very favorable terms, and thus to continue spending more money than is produced from tax revenue.
A credit rating signals to investors and lenders how probably it is that a borrower has the ability to repay a loan. A solid rating means lenders do not have anything to worry about. A lower letter score usually causes bond investors to request higher interest rates on debt.
Consequently, higher rates contribute to the nation’s total debt burden and can compel the government to increase taxes, decrease spending, or both. That predicament has been exemplified in Portugal and Greece, with marches and strikes as residents protest in the streets against strict austerity changes that decrease state benefits and entitlements.
“Growth alone will not resolve an increasingly complicated debt equation,” Moody’s explained. “Preserving debt affordability” — the ratio of payments on interest to government revenue — “at levels consistent with Aaa ratings will invariably require fiscal adjustments of a magnitude that, in some cases, will test social cohesion.” The U.S., France, Britain, and Germany have always had triple-A ratings from Moody’s, with the U.S. receiving its first rating in 1949.
Stable for Now
Pierre Cailleteau, the sovereign risk managing director at Moody’s, emphasized that none of the countries’ ratings were “threatened so far.”
But he did distinguish among the top nations, saying that the U.S. and Britain are in the most precarious position.
“The U.K. and the U.S. are more tested than, say, Germany or France,” Mr. Cailleteau wrote in an e-mailed reply to a question.
“Their rating relies, more than in other countries, on their ability to repair the damage caused by the crisis on public finances,” he noted.
For the time being, America’s debt is still affordable, Moody’s reported, as the ratio of interest payments to revenue dropped to 8.7 percent this year, after rising to a high of ten percent two years ago. If that trend began to reverse, the Moody’s analysts explained, “there would at some point be downward pressure on the AAA rating of the federal government.”