The gold-plated AAA credit rating of the United States may be at risk as the nation copes with growing debt. Moody’s states that even US Treasury bonds which carry a AAA credit rating, 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 credit rating 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 credit rating 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? Moody’s cut Japan’s AAA credit rating last May as the market grew uneasy with Japan’s debt burden.
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 will take the initiative to raise interest rates before the economy is ready.