Moody’s remains confident in the Aaa ratings of France, Germany , the UK and the US in its just-published “Aaa Sovereign Monitor, which focuses on the potential paths of fiscal metrics over the next four years under different scenarios.
For the four largest Aaa countries — France, Germany, the UK and the US — these paths show little change from those analyzed by Moody’s last August. Looking beyond the near-term evolution of their credit metrics, Moody’s emphasizes that all four countries face dramatic increases under their existing policy commitments arising from ageing-related pension and healthcare subsidies. These future costs must be brought under control if these countries are to maintain long-term stability in their debt burden credit metrics.
With respect to shorter-term considerations, the US has taken a different approach than the other three in its response to the economic and fiscal problems that have emerged in the aftermath of the Great Recession. In particular, the US has recently rolled out a program of additional stimulus while, in contrast, the UK’s coalition government has introduced a strong program of deficit reduction in order to address the steep increases in government debt as a result of the financial crisis. These two countries have seen the steepest increases in government debt as a result of the financial crisis.
Germany and France have also recorded significant debt increases, but have on balance moved toward deficit reduction, France less aggressively so than Germany.
Despite these differing strategies, Moody’s continues to believe that all of these countries still possess debt metrics — including the debt affordability (i.e. the ratio of interest payments to government revenue) — that are compatible with their Aaa ratings.
Apart from focusing on the “Big Four” Aaas, Moody’s “Aaa Sovereign Monitor” also contains updates on the three Aaa-rated sovereigns in the Asia-Pacific region: Australia, New Zealand and Singapore. Fiscal metrics for Australia and Singapore are among the strongest of Aaa-rated sovereigns. Moody’s expects Australia to continue to post one of the lowest debt levels of any Aaa-rated sovereign. Although Singapore’s debt is higher, the country is a net creditor and is forecast to record the fastest growth rate in Asia for 2010. New Zealand’s debt position compares favourably with the group, but its near-term trajectory shows a further rise in its debt ratios before a reversal is achieved.