Moody's warns of possible downgrade in U.S. debt rating

LONDON — 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 AAA-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.

For now, though, Moody's said the AAA 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 debt when going to the bond markets to raise capital.

However, debt affordability is "most stretched" in Britain and the United States, 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 damage the global crisis inflicted on government finances.

Moody's said AAA governments also face a "delicate balancing act" with respect to the timing of these adjustments.

"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.

In the United States, 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.

Conversely, Moody's said Spain's was the first AAA government to rise to the challenge when faced with meaningful market pressure to begin winding down stimulus measures.

Moody's warns of possible downgrade in U.S. debt rating 03/15/10 [Last modified: Monday, March 15, 2010 8:08pm]

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