Friday, February 13, 2009

Rescue Efforts Ding U.S.'s Triple-A Rating

By LIZ RAPPAPORT The creditworthiness of the U.S. is deteriorating more rapidly than most of its triple-A rated brethren. The effects of the U.S.'s efforts to solve the financial and economic crisis are taking a toll on the country's ability to uphold a triple-A rating, according to a report published by Moody's Investors Service, though the agency shied away from warning of any ratings downgrade. As the government moves forward with President Barack Obama's $789.5 billion stimulus package and the Treasury gears up to borrow as much as $2 trillion with new debt sales this year, Germany, France, Canada and Scandinavian countries are pulling ahead of the U.S. as stronger credits, said the report. While all face headwinds, they remain triple-A. "By the end of a two year period, the U.S. debt ratios will be higher and moving the country's metrics to the lower end of the pack," said Steven Hess, sovereign credit analyst at Moody's. Mr. Hess said that while the analysis on the U.S. is the current view, "this triple rating isn't assured forever." Regardless of the U.S. spending spree, investors around the world still buy U.S. Treasury bonds when they become anxious about the financial system, as it is the world's largest bond market and functions in dollars, the world's reserve currency. The 10-year Treasury rose in price Thursday to yield 2.732%, while the two-year bond rose as well, to yield 0.883%. The U.S. and the United Kingdom are what Moody's called "resilient triple-A" rated nations facing big tests as the economic downturn stresses their ability to harvest revenue from taxes and as they take on debt to rescue large financial institutions and restore markets to health. Moody's notes, though, that the U.S. is uniquely positioned to restore its financial health once the crisis abates, given the size of its economy and its tax base. France, Germany, Canada and the Scandinavian nations have suffered less of a shock to their economies, said Moody's, leaving them "resistant" to current challenges. Ireland and Spain, meanwhile, are deemed "vulnerable" to more sustained financial damage. Moody's has warned of a possible downgrade of Ireland's debt by giving it a negative outlook and noting its low tax rates attracted business in the good times, but could be a problem in the future. The U.S. government's debt at the end of 2008 totaled $5.8 trillion, or about 41% of the nation's total economic activity, or gross domestic product. By the end of 2010, Moody's expects the nation's debt load to increase to $9 trillion, bringing the ratio of the nation's debt to its GDP to 62%. The U.K.'s ratio of debt to GDP is also expected to jump, while Germany's debt compared to its output, about 40% of GDP, will likely increase to just 47% by 2010. France's debt ratios also aren't likely to rise more than 10%.

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