Even before yet-to-be-determined costs of nationalized health care are added to the federal budget, crushing deficits added to national debt by Obama and the Democrats are forcing credit rating agencies to consider lowering America’s gold-plated AAA credit rating.
The gold-plated credit rating of the United States may be at risk as the nation copes with growing debt. Moody’s states that even AAA-rated US Treasury bonds, considered the safest of investments, could be downgraded if Washington continues on its current path of failing 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 rating agency said.
Preserving debt affordability at levels consistent with AAA ratings will invariably require fiscal adjustments of a magnitude that, in some cases, will test social cohesion.
Moody’s Investor Services
A downgrade would negatively affect the country’s ability to keep borrowing money on favorable terms. If cut, investors will demand higher interest rates on Treasury Bonds.
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.
“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” said Moody’s, with the United States and Britain in the toughest position.
Believe a downgrade to the US Credit Rating can’t happen? Remember that Moody’s cut Japan’s AAA rating last May as the market grew increasingly uneasy with Japan’s debt burden.
The Obama administration estimates that the US deficit will rise to 10.6 percent of gross domestic product in the current fiscal year – the highest since World War II – and federal debt will reach 64 percent of gross domestic product. Government expenditures under Obama will rise to a postwar high of 25.4 percent of GDP this year.
Growth will support some governments’ adjustment plans, 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, which will compound an already complicated debt equation, with abrupt rating consequences becoming necessary.