US and Britain more likely to have top debt rating reduced
By Pan Pylas |
March 16, 2010, Tuesday
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Print Edition
Print Edition
THE United States and Britain are more likely than Germany and France to witness an embarrassing downgrade of their top debt rating, Moody's Investors Service said yesterday.
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 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," said Arnaud Mares, senior vice president in Moody's sovereign risk group.
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 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 US, 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 that 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.
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 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," said Arnaud Mares, senior vice president in Moody's sovereign risk group.
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 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 US, 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 that 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.
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