Top US debt rating untarnished by weak dollar

NEW YORK - Concerns over the huge US "twin" deficits walloped the dollar in the last three months of 2004, but it will take a lot more to put the country's top-notch debt rating in jeopardy, analysts say.

Nevertheless, how President George W. Bush intends to contain the US budget and trade gaps and overhaul Social Security -- topics sure to be addressed in next week's State of the Union speech -- will have bearing on the government's fiscal health, they say.

Standard & Poor's and Moody's Investors Service, major debt rating agencies, said they have no near-term plans to review their highest possible sovereign debt ratings on the United States despite the likelihood that US deficits will continue to weigh on the dollar.

"The US 'AAA+' rating is secure against all reasonable scenarios," said John Chambers, deputy head of sovereign debt ratings at Standard & Poor's in New York.

Record-setting federal budget and trade shortfalls last year spooked currency traders, who pushed the dollar to all-time lows against the euro.

A rapidly falling currency often sparks domestic inflation as imported goods become more expensive, while the boost to exports is seldom immediate.

But analysts say that because the United States is able to borrow solely in its own currency, it is in a unique position that offsets the negative effect of the soft dollar.

"In one sense the United States is in an extraordinarily strong position simply because of that... and the dollar remains the most important single currency in the world," said Vincent Truglia, managing director of the sovereign risk unit at Moody's in New York.

"That also makes it easier for the United States to fund all of its large deficits," he said. Most countries issue sovereign debt denominated in US dollars and keep large reserves of the currency.

Currently, just over a quarter of US government debt is parked in foreign central banks.

Plus, the US government's budget gap could actually be improving. The deficit in the last three months of 2004 totaled US$118.61 ($168.31) billion, down from the US$130.16 billion shortfall in the same period of 2003.

The ratio of the budget deficit to gross domestic product in current dollar terms -- a commonly used gauge at rating agencies -- is expected to reach 3.6 per cent in the current fiscal year and then fall to 3.1 per cent and 2.8 per cent in ensuing years, according to Citigroup.

"The US government's debt is higher than we'd like," but still not as high as other "AAA+ "-rated countries like France or Germany, said S&P's Chambers.

However, concerns exist.

For one, the Bush administration's ambitious plan to overhaul Social Security without raising payroll taxes could boost government borrowing by US$1 trillion to US$2 trillion over the next 10 years, according to some estimates.

How that squares with the president's campaign promise to halve the budget deficit in five years is unclear.

"Historically, projections about US budgets and surpluses have a low accuracy in both directions," said Moody's' Truglia.

In addition, US consumption, which accounts for over two-thirds of gross domestic product and is a driver of global economic growth, depends heavily on foreign borrowing.

The ratio of US debt held abroad to current account receipts is projected to reach 365 per cent this year, according to S&P.

That would be one of the highest ratios among rated sovereign issuers. So far, the declining dollar has not deterred foreign investors from buying US assets. In fact, the latest data show net capital inflows in November hit a five-month high of US$81 billion just as the dollar was plumbing nine-year lows against a basket of major currencies.

Nevertheless, sovereign debt analysts are monitoring investment flows closely.

"The heavy reliance on foreign capital could pose a risk to the US economy," S&P said in a report.

"Should capital flows slow suddenly, interest rates will rise and undercut growth. "

- REUTERS