Debt puts US credit rating at risk, agency says
A downgrade would increase borrowing costs
The gold-plated credit rating of the United States — an article of faith across America and, indeed, around the world — may be at risk in coming years as the nation copes with its burgeoning debts.
That sobering assessment, issued yesterday by Moody’s Investors Service, provided a reminder that even Aaa-rated US Treasury bonds, supposedly the safest of safe investments, could be downgraded one day if Washington failed to manage the federal debt.
Moody’s said the United States and other major Western nations, particularly Britain, have moved substantially closer to losing their gilt-edged ratings. The ratings are stable, but “their ‘distance-to-downgrade’ has in all cases substantially diminished,’’ the credit ratings agency said.
A downgrade would affect more than US pride. The bigger risk would be to the country’s ability to keep borrowing money on extremely favorable terms, and therefore to keep spending more money than it takes in from tax revenue.
A credit rating lets lenders and investors know how likely it is a borrower can pay back a loan. A sterling rating means there is little for lenders to worry about. A lower one typically results in bond investors demanding higher interest rates on debt. Those higher rates, in turn, add to the country’s overall debt burden and could force a government to reduce spending, increase taxes, or both. That difficulty has been illustrated recently in Greece and Portugal, with strikes and protests as citizens hit the streets to oppose tough austerity measures that directly reduce entitlements and state benefits.
“Growth alone will not resolve an increasingly complicated debt equation,’’ Moody’s said. “Preserving debt affordability’’ — the ratio of interest payments 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 United States, Britain, France, and Germany have always been rated triple-A by Moody’s, with the United States first rated in 1949.
Pierre Cailleteau, managing director of sovereign risk at Moody’s, stressed that none of their ratings were “threatened so far.’’
He noted that Britain and the United States are in the toughest position.
Last May, Moody’s cut Japan’s Aaa rating to Aa2, as the market grew increasingly uneasy with Japan’s debt burden.
