More Trouble with U.S. Credit

Moody’s website reports U.S. debt rating remains Aaa…for now

It was widely reported yesterday (Tuesday, September 11) that the United States is in danger of another credit downgrade, this time by Moodys. In its press release the credit rating agency said that it would likely downgrade the U.S. government’s debt rating from Aaa to Aa1 if federal budget negotiations in the 2013 Congress are unable to produce “specific policies that produce a stabilization and then downward trend in the ratio of federal debt to GDP over the medium term”. In some respects, this shouldn’t come as a surprise. A year ago, Moody’s cut its outlook on U.S. debt to “negative” after partisan negotiations over raising the U.S. debt limit threatened to cause the nation to default.  With the debt limit again approaching by the end of this year, it’s likely that we are due for another show of brinksmanship and this further influences Moody’s negative outlook.

Moody’s view is largely in sync with Standard & Poor’s, which lowered its rating of U.S. debt securities last August from AAA to AA+. At the time S&P noted that:

“The political brinksmanship of recent months highlights what we see as America’s governance and policymaking becoming less stable, less effective, and less predictable than what we previously believed. The statutory debt ceiling and the threat of default have become political bargaining chips in the debate over fiscal policy. Despite this year’s wide-ranging debate, in our view, the differences between political parties have proven to be extraordinarily difficult to bridge, and, as we see it, the resulting agreement fell well short of the comprehensive fiscal consolidation program that some proponents had envisaged until quite recently. Republicans and Democrats have only been able to agree to relatively modest savings on discretionary spending while delegating to the Select Committee decisions on more comprehensive measures. It appears that for now, new revenues have dropped down on the menu of policy options. In addition, the plan envisions only minor policy changes on Medicare and little change in other entitlements, the containment of which we and most other independent observers regard as key to long-term fiscal sustainability.”

The S&P downgrade was historically significant because it marked the only time the U.S. credit rating was not ranked in the top tier. It also put the U.S. government in the odd position of having a lower credit rating than four U.S. companies: Microsoft, Automatic Data Processing, Johnson & Johnson and Exxon Mobil (were Apple to have any debt to rate it would surely be on this list as well). Nonetheless, U.S. borrowing rates have actually declined over the past year. U.S. government bonds still provide a safe harbor as compared to debt in other parts of the world. With the Europe struggling through its own economic crisis, U.S. treasuries continue to attract investors.

If Moodys were to downgrade the U.S. today, the sovereign debt of 16 countries would hold a better credit rating:

United Kingdom Aaa NEGATIVE
Switzerland Aaa STABLE
Sweden Aaa STABLE
Singapore Aaa STABLE
Norway Aaa STABLE
New Zealand Aaa STABLE
Netherlands Aaa NEGATIVE
Luxembourg Aaa NEGATIVE
Isle of Man Aaa STABLE
Germany Aaa NEGATIVE
Finland Aaa STABLE
Denmark Aaa STABLE
Canada Aaa STABLE
Austria Aaa NEGATIVE
Australia Aaa STABLE