Moody's Warns About Federal Debt

Today, Moody's Investors Service, a bond rating company, issued a warning about the the federal debt. I couldn't get access to the complete report, but following is the press release. BB

London, 15 March 2010 -- The ratings of all Aaa governments are currently well positioned despite their stretched finances, says Moody's Investors Service in the third issue of its quarterly Aaa Sovereign Monitor.

Moody's new report provides an update about the situation of the four largest Aaa governments -- Germany, France, the UK and the US -- as well as other selected Aaa countries: Spain and the less fiscally challenged Denmark, Finland, Norway and Sweden. In its examination of these countries' unchanged creditworthiness, Moody's identifies the key challenges facing them.

The recovery that has taken hold across the global economy remains fragile in several of the large advanced economies, most of which have also implemented the most aggressively expansionary fiscal and monetary policies. "This exposes governments to substantial execution risk in the implementation of their exit strategies, which could yet make their credit more vulnerable," says Arnaud Marès, Senior Vice President in Moody's Sovereign Risk Group and the main author of the report.

However, debt affordability -- i.e. the ratio of interest payments to government revenues -- indicates that the ratings of all Aaa governments remain well positioned, despite the reduction in their 'distance-to-downgrade' and the widening of tail risk

One of the report's key conclusions is that the Aaa ratings of the UK and the US, whose debt affordability is currently the most stretched, continue to be supported by substantial 'debt reversibility'. A special section at the end of Moody's new report elaborates on the concept of debt reversibility, which addresses the extent to which a government is able to repair its balance sheet after a shock.

"In light of the muted recovery, discretionary fiscal adjustment is now the principal means of repairing the damage that the global crisis has inflicted on government balance sheets," says Pierre Cailleteau, Managing Director of Moody's Sovereign Risk Group. "A key issue is whether governments are able and willing to implement such unprecedented adjustments. Growth will support some governments' adjustment plans more than those of others, but no government can rely on it," adds Mr. Cailleteau.

Aaa governments also face a delicate balancing act with respect to the timing of these fiscal adjustments: tightening fiscal policy before private demand has become self-sustained could risk undermining the recovery, and thereby damage governments' power to tax. However, 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," indicates Mr. Cailleteau.

"Given the heightened market tensions surrounding sovereign debt, the ability of Aaa governments to anchor fiscal expectations -- such as through the provision of detailed consolidation programmes or the introduction of formal rules -- will be key to avoiding the risks associated with postponing fiscal consolidation", says Mr. Marès. In Moody's view, Spain recently became the first Aaa government to rise to this challenge when faced with meaningful market pressure to announce such measures, although its adjustment process will undoubtedly be drawn out and painful. Other large Aaa governments are not immune to facing the same pressure in the coming months.

This third issue of the Aaa Sovereign Monitor also focuses on the Nordic countries, three of which had previously faced severe economic and financial crises in the early 1990s. These countries entered the current crisis in a much stronger position, with robust, more competitive and more diversified economies as well as healthier public finances. Importantly, all of the mainland Nordic countries had established a track record of fiscal prudence in pre-crisis years. "The ample fiscal space created before the crisis and high degrees of debt affordability therefore provide robust protection for the Nordic countries' Aaa ratings," says Kristin Lindow, Moody's Regional Credit Officer (Europe/Africa) in the Sovereign Risk Group.

Moody's Aaa Sovereign Monitor is available to Moody's subscribers at www.moodys.com

London

Pierre Cailleteau

Managing Director

Sovereign Risk Group

Moody's Investors Service Ltd.

Note: I found a copy of the complete report here.