Moody's Downgrade May Come As Soon as 2013

-- USA Credit Rating downgrade warning - illustration --Moody's has been making noises about a possible downgrade of the USA's perfect AAA credit rating for a while now.

Many people dismissed these grumblings from the company, certain the Moody's would never actually take the action of downgrading the United States from a AAA rating.

However, Moody's has taken the step of issuing an outline of when the US might have their rating reduced.

An outline? Maybe a better word is warning.

According to Moody's manager director Pierre Cailleteau, debt service of 18-20% of federal revenue is the danger zone for the United States in terms of maintaining their AAA rating. At this point, according to Cailleteau, the United States would be at the "outer limit of AAA-territory."

So when might the United States reach the point of spending 18-20% of their federal revenues on the servicing of their debt load?

According to the CBO, the United States will likely spend a little more than 18% of their revenues on interest by 2018. This number will be bumped up to 20% by 2020, under the Obama budget.

So, under this scenario, the US might run the risk of losing their rating somewhere between 2018 and 2020.

The CBO has also considered "more adverse scenarios" in which the country could be spending more than 22% of their revenues on interest by 2013.

According to Moody's, it is not the actual amount of debt that the United States possesses that is the main concern - it's the amount of interest paid compared to annual revenues. Or, the "affordability" of the debt load.

What does this mean? It means that higher revenues would take the United States out of the "danger zone", even if their debt load skyrockets (as expected) over the next decade.

In order to increase revenues, the United States needs to increase personal and corporate tax receipts.

One last note - according to the CBO (Congressional Budget Office), the United States is expected to be paying around $723 billion in annual net interest by 2020.

Source: - US Debt Shock May Hit in 2018, Maybe as Soon as 2013

Filed under: The Economic Meltdown

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