the visible hand

it is the theory which decides what can be observed – einstein

US of credit rating fears

Posted by ecoshift on February 4, 2010

FT.com / Companies / Financial Services
By Michael Mackenzie in New York and Gillian Tett in London
Published: February 3 2010 19:53 | Last updated: February 3 2010 19:53

Moody’s Investors Service fired off a warning on Wednesday that the triple A sovereign credit rating of the US would come under pressure unless economic growth was more robust than expected or tougher actions were taken to tackle the country’s budget deficit.

In a move that follows intensifying concern among investors over the US deficit, Moody’s said the country faced a trajectory of debt growth that was “clearly continuously upward”.

Steven Hess, senior credit officer at Moody’s, said the deficits projected in the budget outlook presented by the Obama administration outlook this week did not stabilise debt levels in relation to gross domestic product.

“Unless further measures are taken to reduce the budget deficit further or the economy rebounds more vigorously than expected, the federal financial picture as presented in the projections for the next decade will at some point put pressure on the triple A government bond rating,” the rating agency added in an issuer note.

This week, the White House forecast a $1,565bn budget deficit for 2010, which represents 10.6 per cent of gross domestic product and is the highest such ratio of debt to GDP since the second world war.

While the budget gap is forecast to fall to about 4 per cent by 2013, it is based in part on economic growth not falling below government expectations, Congress agreeing to tax rises and a spending freeze on non-security discretionary spending.

Crucially, projections of the overall debt-to-GDP ratio for the US are seen rising from 53 per cent in 2009 to 73 per cent in 2015 and 77 per cent by 2020.

Moody’s, however, says this understates the overall US debt level.

“Using the general government measure, including state and local governments as well as the federal government, which is used internationally, this ratio would be well over 100 per cent in 2020.”

The issue of sovereign risk dominated many discussions in the Davos World Economic Forum last week. While much attention focused on the fiscal crisis in Greece, considerable concern was also voiced about the outlook for countries such as the US and UK.

“Everyone has reason to be concerned about the US economy right now and the US dollar,” said Tony Tan, deputy head of the Government of Singapore Investment group. “We still think that the US economy is the most diversified and resilient in the world, but it is going through a difficult time.”

At the heart of investor concerns is whether countries such as the US with its rising debt burdens has the political will, or the sense of consensus, to take decisive measures to cut debt.

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