U.S. Dealing with a Boatload of Debt - Moody's

Includes: DIA, SPY, TLT
by: SA Eli Hoffmann

Moody's is out with a note today addressing America's burgeoning debt load.

Some key excerpts:

The US government's financial position is projected to worsen considerably over the coming two years as a result of measures taken to aid the financial sector, the effects of the recession and the upcoming stimulus package.

At the end of fiscal year 2008, debt borrowed from creditors outside the federal government, the most relevant measure of federal government debt, amounted to $5.8 trillion, equivalent to 40.8% of US GDP. Compared with the central government debt of other Aaa-rated countries, this is a moderate level. However, total debt held by the public is projected to rise by more than half during the coming two years, reaching $9.0 trillion, or 62% of GDP by the end of fiscal year 2010. In the meantime, however, most other Aaa governments will see their debt metrics deteriorate as well.

Moody's also examines the ratio of this debt to the federal government's own revenue, which is a measure of the resources available at any moment to repay the debt.

At the end of fiscal year 2008, the ratio was 230%, quite high for a Aaa-rated country. Moreover, this is also forecast to rise steeply in the next two years, reaching 378% by the end of fiscal year 2010. The burden of the debt, measured as the ratio of interest paid to the government's revenue, is another important indicator. In fiscal year 2009, this ratio is projected at about 9.5%, also a high level among Aaa countries.

Whether in 2010 or after, interest rates are almost certain to rise from their current low levels and the affordability of the federal government debt will deteriorate.

A cautionary note:

Simply adding up liabilities does not provide a sound perspective on how burdensome the debt has become for the government, nor does it enlighten the debate about the strength of the US government balance sheet on a comparative basis.