Monday, March 15, 2010
Today, Moody's is again hinting about sovereign credit downgrades for the U.S. and UK..
As Bloomberg writes:
The U.S. and the U.K. have moved “substantially” closer to losing their AAA credit ratings as the cost of servicing their debt rose, according to Moody’s Investors Service.
The governments of the two economies must balance bringing down their debt burdens without damaging growth by removing fiscal stimulus too quickly, Pierre Cailleteau, managing director of sovereign risk at Moody’s in London, said in a telephone interview.
Under the ratings company’s so-called baseline scenario, the U.S. will spend more on debt service as a percentage of revenue this year than any other top-rated country except the U.K., and will be the biggest spender from 2011 to 2013, Moody’s said today in a report.
“We expect the situation to further deteriorate in terms of the key ratings metrics before they start stabilizing,” Cailleteau said. “This story is not going to stop at the end of the year. There is inertia in the deterioration of credit metrics.”***
Under its adverse scenario, which assumes 0.5 percent lower growth each year, less fiscal adjustment and a stronger interest-rate shock, the U.S. will be paying about 15 percent of revenue in interest payments, more than the 14 percent limit that would lead to a downgrade to AA, Moody’s said.
The U.K. is likely to spend 7 percent of revenue servicing debt this year and 9 percent in 2013, rising to almost 12 percent under the adverse scenario, Moody’s said.
Financing costs above 10 percent put countries outside of the AAA category into a so-called debt reversibility band, the size of which depends on the ability and willingness of nations to reduce their debt burden by raising taxes or reducing spending. The U.S. has a 4 percentage-point band, while the U.K. has a 3 percentage-point band.
“Those economies have been caught in a crisis while they are highly leveraged,” Cailleteau said, referring to the level of private and public debt as a percentage of gross domestic product. “They have to make the required adjustment to stabilize markets without choking off growth.”
The U.S. would be the “most affected” under the adverse scenario, as the only country that would face a downgrade, Cailleteau said.
“The pattern of growth and the high rate of unemployment raise the question of how strong the recovery will be going forward,” Moody’s said. “The ability of the U.S. economy to grow more rapidly and, therefore, for government revenues to contribute to fiscal consolidation, will have to depend on a revival in the growth of consumption.”***
“The question here is less when fiscal retrenchment ought to start, but rather how credible it is that sufficient retrenchment will take place,” Moody’s said.
It is no surprise that Moody's says the chance of a downgrade for the U.S. and UK is higher than for Germany and France.
This is not all that controversial any more. Even Bill Gross has said that America will lose its AAA rating.
Of course, Moody's entire business model is to take bribes in return for providing favorable ratings for the entities it rates ("It could be structured by cows and we would rate it"), they gave high ratings to Wall Street giants as they were already tipping over and hitting the ground, and some have alleged that the government is more or less blackmailing the ratings agencies into maintaining America's triple A rating. So I'm not exactly sure why anyone is still paying attention to what Moody's (or S&P or Fitch) are saying.
But the above-quoted Bloomberg article also notes one very insightful comment by Moody's managing director of sovereign risk:
Achieving the fiscal consolidation necessary to avert a downgrade will test “social cohesion” and may involve rewriting the “social contract” between governments and their people, Cailleteau said. “People have to decide what level of pain they are willing to accept to have a healthy economy.”Of course, stopping unnecessary imperial wars or taking steps to slash America's interest payments on financing its debt is unthinkable to the political class.
Arguably, the American and British governments have already broken the social contract with their people. Indeed, if they hadn't launched unnecessary wars based upon false rationales (if Iraq solely grew broccoli, and if broccoli was the main export of the Middle East, would we have invaded?) and if they hadn't sold out to the money-changers, the sovereign ratings of the two countries wouldn't be so precarious in the first place.