Sunday, May 9, 2010

Moody's: U.S. Debt Downgrade Could Come in 2013

Forget about Greece, the mother of all debt crisises could hit in 2013. That would be when U.S. debt gets out of control because of huge interest payments that will have to be made.

"In the wake of the financial crisis and recession, Moody's Investors Service has brought new transparency to its sovereign ratings analysis — so much so that 2018 lights up as the year the U.S. could be in line for a downgrade if Congressional Budget Office projections hold," according to Investor's Business Daily.

The key data point in Moody's view is the size of federal interest payments on the public debt as a percentage of tax revenue. For the U.S., debt service of 18%-20% of federal revenue is the outer limit of AAA-territory, Moody's managing director Pierre Cailleteau confirmed in an e-mail to IBD.

Under the Obama budget, interest would top 18% of revenue in 2018 and 20% in 2020, CBO projects.

But under more adverse scenarios than the CBO considered, including higher interest rates, Moody's projects that debt service could hit 22.4% of revenue by 2013. That is when Moody's would pull the plug on the U.S. AAA rating.

"While we see limited risk of a U.S. sovereign debt downgrade in the next 2-3 years, beyond that we cannot be so certain," wrote Societe Generale's economics team in a recent report.

This is another indication of how much pressure Fed chairman Ben Bernanke will be under to keep interest rates low, by printing money.

Bottom line: At some point, most likely through a near-hyper inflation, all hell is going to break loose in the United States. Be prepared.

No comments:

Post a Comment