US, Britain's credit rating at risk

LONDON - The United States and Britain have moved "substantially" closer to losing their AAA credit ratings as the cost of servicing their debt rose, according to Moody's Investors Service.

The governments of the two economies must balance bringing down their debt burdens without damaging growth by removing fiscal stimulus too quickly, Pierre Cailleteau, managing director of sovereign risk at Moody's in London, said.

Under the ratings company's baseline scenario the US will spend more on debt service as a percentage of revenue this year than any other top-rated country except Britain, and will be the biggest spender from 2011 to 2013, Moody's said yesterday.

"We expect the situation to further deteriorate in terms of the key ratings metrics before they start stabilising," Cailleteau said. "This story is not going to stop at the end of the year. There is inertia in the deterioration of credit metrics."

The US government will spend about 7 per cent of its revenue servicing debt this year and almost 11 per cent in 2013, according to the baseline scenario of moderate economic recovery, fiscal adjustments in line with government plans and a gradual increase in interest rates, Moody's said.

Under its adverse scenario, which assumes 0.5 per cent lower growth each year, less fiscal adjustment and a stronger interest-rate shock, the US will be paying about 15 per cent of revenue in interest payments, more than the 14 per cent limit that would lead to a downgrade to AA.

Britain is likely to spend 7 per cent of revenue servicing debt this year and 9 per cent in 2013, rising to almost 12 per cent under the adverse scenario, Moody's said.

Financing costs above 10 per cent put countries outside of the AAA category into a so-called debt reversibility band, the size of which depends on the ability and willingness of nations to reduce debt burden. The US has a 4 percentage-point band, while Britain has a 3 percentage-point band.

"Those economies have been caught in a crisis while they are highly leveraged," Cailleteau said, referring to the level of private and public debt as a percentage of gross domestic product.

The US would be the "most affected" under the adverse scenario, as the only country that would face a downgrade, Cailleteau said.

- BLOOMBERG