» This Story:Read +| Comments

Moody's warns nations to cut spending or risk AAA ratings

Discussion Policy
Comments that include profanity or personal attacks or other inappropriate comments or material will be removed from the site. Additionally, entries that are unsigned or contain "signatures" by someone other than the actual author will be removed. Finally, we will take steps to block users who violate any of our posting standards, terms of use or privacy policies or any other policies governing this site. Please review the full rules governing commentaries and discussions. You are fully responsible for the content that you post.
Washington Post Foreign Service
Tuesday, March 16, 2010

The United States and other top world economies need to make potentially painful government spending cuts or risk losing the high-grade credit ratings that have kept borrowing affordable, the Moody's rating agency said Monday.

This Story

Outlining the dilemma faced by policymakers in the United States, Great Britain, Germany and France, Moody's said that debt levels in the four large credit-worthy economies had reached the point at which they are at risk of being downgraded -- a step that would drive up interest rates, increase borrowing costs and mark a turn in perceptions about the world economy.

Economic recovery might ease the problem by increasing tax revenue, Moody's reported, but "growth alone will not resolve an increasingly complicated debt equation. Preserving debt affordability at levels consistent with AAA ratings will invariably require fiscal adjustments of a magnitude that, in some cases, will test social cohesion."

The dollar rose against major currencies despite the report, a reminder of its continued role as the world's reserve currency.

The agency said a downgrade did not appear imminent and expressed confidence that the four countries would come to grips with their fiscal problems. Germany, the report said, has included a new debt provision in its laws, and the United States has established a commission on spending reform.

But the report nevertheless emphasized the growing concern over government deficits worldwide. A possible default by Greece has focused attention on the wide discrepancy in the health of the European economies and prompted European Union officials to debate ways to help Greece and other economically weaker countries. Spending cuts in Greece have triggered strikes and social unrest in recent weeks.

In economically healthier European countries such as Germany, France and Great Britain -- as well as the United States -- policymakers face a no-less urgent quandary, Moody's said, as they craft an "exit strategy" for the emergency programs adopted in response to the economic crisis.

Those programs resulted in ballooning deficits as money was pumped in to stimulate the economy and prop up banking and financial institutions. Reducing spending too soon could undercut what is still considered a fragile economic recovery, Moody's said, but waiting too long could put the world's top economies at risk of a debt spiral in which financing deficits becomes increasingly difficult and expensive.

Delaying the needed spending controls "would test the patience of the market. . . . Although AAA governments benefit from an unusual degree of balance sheet flexibility, that flexibility is not infinite," Moody's wrote. "We believe that the ratings of all large AAA governments remain well positioned -- although their 'distance-to-downgrade' has in all cases substantially diminished."

All four countries have projected that debt will rise to 80 percent or more of annual economic production, the Moody's report said, adding that debt-servicing costs in those countries are approaching the level that might warrant a downgrade.

» This Story:Read +| Comments

More in Business

Time Space Economy

Time Space Economy

Explore economy news through text and photos from around the world.

WashBiz Blog

Local Companies

Post editors and writers keep you informed about the region's business community.

Economy Watch

Economy Watch

Stay updated with the latest breaking news about the financial crisis.

© 2010 The Washington Post Company