U.S. Rating Outlook Stable Despite Debt - Moody's

Even with a significant deterioration in the US government’s debt position, its rating has a stable outlook and demonstrates the attributes of a Aaa sovereign, Moody’s (MCO) says in its annual report on the United States.

These attributes include a diverse and resilient economy, strong government institutions, high per capita income, and a central position in the global economy. “Moody’s expects that, because of these factors, US economic strength will emerge after the crisis without major impairment,” said Moody’s Vice President Steven Hess, author of the report. “The global role of the US currency also contributes to the ability of the economy and government finances to rebound.”

He said the government balance sheet has been weakened by the combination of efforts to stabilize the financial system, the effects of the sharp economic recession on federal finance, and the $787 billion federal stimulus package passed earlier this year.

The result has been much higher debt ratios that may persist for some years to come. While these ratios are deteriorating in the US, they are also doing so in most other advanced economies due to the global recession.

Furthermore, the level of debt is less important than the government’s balance sheet flexibility, which Moody’s believes is still high in the case of the US.

Despite a worsening government balance sheet, Moody’s cites other factors in support of the Aaa rating. “The current economic downturn has only temporarily altered America’s productivity dynamic, and productivity has risen in the recession period, as is typical,” said Hess. “US labor market flexibility has been a key factor in this trend.”

A higher rate of US population growth through 2025 relative to other advanced economies will also contribute to continued economic growth — and government revenues.

“While our outlook for the US rating is stable, a reassessment of the long-term growth prospects of the economy and the ability of the government to return to a sustainable debt trajectory could put negative pressure on the rating in the future. How the economy and fiscal policy fare after the recession will be key,” said Hess. He added that, over the longer term, contingent liabilities related to Social Security and Medicare programs could also pressure the rating.

Comments

[Dave Wrixon:]

It would seem that whilst bailouts to Car Companies cannot come from TARP that bribes to rating agencies are admissible.

May 28 01:03 PM

[Steve in Gr...:]

The rating agencies are trailing indicators.

May 28 02:27 PM

[Michael_Cohen:]

Who cares what Moody's says anymore?

May 28 04:14 PM