Monday, March 15, 2010

U.S., U.K. Move Closer to Losing AAA Rating, Moody’s Says

Bloomberg reports:
The U.S. and the U.K. have moved “substantially” closer to losing their AAA credit ratings as the cost of servicing their debt rose, according to Moody’s Investors...

Under the ratings company’s so-called baseline scenario, the U.S. will spend more on debt service as a percentage of revenue this year than any other top-rated country except the U.K., and will be the biggest spender from 2011 to 2013, Moody’s said today in a report.

“We expect the situation to further deteriorate in terms of the key ratings metrics before they start stabilizing,” 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 U.S. government will spend about 7 percent of its revenue servicing debt in 2010 and almost 11 percent 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.
If Moody's thinks rates are high now, we should check back with them in six months and see what they think.

Overall, this is an interesting warning from Moody's, but it must be pointed out that the U.S. and U.K., unlike the PIIGS, can print their own money to payoff their debts. This is not a pretty scenario, but it substantially decreases the likelihood of a straight default by the U.S. or U.K. In other words, default by destruction of the currency is the most likely option, i.e. super high inflation.

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