This article was in the New York Times
By DAVID JOLLY and CATHERINE RAMPELL
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 growing debts.
That sobering assessment, issued Monday by Moody’s Investors Service, provided a reminder that even Aaa-rated United States 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 American 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 that 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 can force the government to reduce spending, increase taxes or both. That difficulty has been well-illustrated recently in Greece and Portugal, with strikes and protests as citizens march in 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.”
But he did differentiate among the top countries, saying that Britain and the United States are in the toughest position.
“The U.K. and the U.S. are more tested than, say, Germany or France,” Mr. Cailleteau said in an e-mailed response to a question.
“Their rating relies, more than in other countries, on their ability to repair the damage caused by the crisis on public finances,” he added.
Without a stronger recovery, governments could encounter serious trouble in phasing out government support for the economy, Arnaud Marès, the main author of the report, said in a statement. That “could yet make their credit more vulnerable,” he said.
Last May, Moody’s cut Japan’s Aaa rating to Aa2, as the market grew increasingly uneasy with Japan’s debt burden.
For now, the United States debt remains affordable, Moody’s said, as the ratio of interest payments to revenue fell to 8.7 percent in the current year, after peaking at 10 percent two years ago. If that trend were to reverse, the Moody’s analysts said, “there would at some point be downward pressure on the Aaa rating of the federal government.”
The administration of President Obama estimates that the United States deficit will rise to 10.6 percent of gross domestic product in the current fiscal year, the highest since 1946, and federal debt will reach 64 percent of gross domestic product. Government expenditures are expected to rise to a postwar high of 25.4 percent of G.D.P.
In Britain, Moody’s said, the risk is that the growth outlook proves too optimistic and tax receipts do not match forecasts, as the government of Prime Minister Gordon Brown has little room left to maneuver.
In that situation, the debt — which the government already predicts will stabilize at around 90 percent of G.D.P. — could balloon, undermining the credit rating.
In comparison to both Britain and the United States, the report said, households in France and Germany entered the crisis with relatively low indebtedness, and hence the governments have a little more room to maneuver. Yet both countries will find themselves under pressure to maintain financial discipline in the event that growth does not pick up.
Mr. Cailleteau at Moody’s said that “discretionary fiscal adjustment” — cutting programs or raising taxes — had become “the principal means of repairing the damage that the global crisis has inflicted on government balance sheets,” and it remained to be seen whether governments were capable of carrying out the painful measures necessary.
“Growth will support some governments’ adjustment plans more than those of others,” Mr. Cailleteau said in the report, “but no government can rely on it.”
There is also a danger that, with governments unwilling or unable to begin withdrawing stimulus, central banks could take the initiative to raise interest rates before the economy is ready, the report found. Such a situation might “quickly compound an already complicated debt equation, with more abrupt rating consequences a possibility.”
Moody’s praised Spain’s recent efforts to address its finances, although “its adjustment process will undoubtedly be drawn out and painful.”
As for the Nordic countries, the agency said the region entered the crisis in relatively good shape, and their credit ratings appeared to be well protected.
