2009-10-23 08:08:00
The United States Must Trim Deficits In Order To Keep AAA Rating, Says Moody's
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Moody's is putting the United States on notice - reduce your deficits over the next couple of years, or else you may lose your AAA credit rating.
With the United States currently forecasting deficits as far as the eye can see (at least half a trillion dollars per year until 2019), a person really has to start to wonder if the US will continue to maintain its pristine credit rating over the next decade.
Moody's currently has a stable outlook for the United States' AAA rating, meaning that there is not expected to be a change for the next 18 months.
However, Moody's lead analyst, Steven Hess, recently appeared on Reuters TV and warned the United States that this might not always be the case.
Hess stated that the AAA rating of the United States is not guaranteed, and that the rating "will be in jeopardy" if the United States doesn't "get the deficit down in the next 3-4 years to a sustainable level". I'm not sure what a "sustainable level" of deficit spending is in the eyes of a Moody's analyst..
As mentioned, the United States currently possesses a Triple A credit rating, which means that their credit risk is "almost zero".
The next step below (in the Moody's rating system) is Aa1, which means a "safe investment with a low risk of failure".
There are a number of AAA-rated countries throughout the world, including the United Kingdom, Norway and Canada.
Just like with a personal credit rating, the lower a country's credit rating, the higher their borrowing costs.
Not only would the loss of their AAA credit rating prove to be extremely embarrassing for the United States, but it would also increase their borrowing costs.
If unemployment remains high in the United States, as many people are now predicting, it will prove to be very difficult for the United States to significantly reduce the size of future deficits.
The Congressional Budget Office is forecasting extremely large deficits between now and 2019, and this takes into account an average unemployment rate of 5.6% between the years of 2012-2015, and 4.8% from 2016-2019.
If the unemployment numbers come in higher than expected over these years, then the United States will very likely post much larger deficit numbers than what is currently expected.
The question now becomes - how does the United States avoid losing their pristine credit rating over the next couple of years?
The answer will very likely be - more taxes.
The prospect of a VAT (Value Added Tax) has been openly discussed by some of President Obama's top economic advisors over the past couple of months.
Are they preparing the public for the introduction of such a tax?
One thing is for certain - the United States will have to work very hard to avoid losing its AAA rating over the next decade or so.
Source: CNBC.com - Reducing Deficit Key to US Rating: Moody's
Reuters.com - VAT Attack! More on Obama, Pelosi and the Value-added Tax
Filed under: The Economic Meltdown
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