PARIS — Major Western economies have moved “substantially” closer to losing their top-notch credit ratings, with the United States and Britain under the most pressure, Moody’s Investors Service said Monday in a reminder that the global debt crisis is not limited to the small or weak.
The ratings of the Aaa governments — which also include Germany, France, Spain and the Nordic countries — are currently “stable,” Moody’s analysts wrote in the report. But, it added, “their ‘distance-to-downgrade’ has in all cases substantially diminished.”
“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.”
That difficulty has been well-illustrated recently in Greece and Portugal, with strikes and protests as citizens hit the streets to oppose tough austerity measures that directly reduce entitlements and state benefits.
“It was to be expected that attention wouldn’t long be restricted to Southern Europe but would shift to other countries with big debts,” Michael Heise, chief economist for the German insurer Allianz in Munich, said.
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, noting 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.”
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.
Credit ratings are important because higher-rated governments are typically able to borrow at lower costs. 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 U.S. 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 Barack Obama estimates that the U.S. 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 G.D.P. 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 don’t 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 noted, households in France and Germany entered the crisis with relatively low indebtedness, and hence the governments have a little more room for maneuver. Yet both countries will find themselves under pressure to maintain financial discipline in the event that growth does not pick up.
Mr. Cailleteau, managing director of sovereign risk at Moody’s, noted 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.
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