January 15, 2008 | Cbonds
|In its annual report on the United States, Moody's Investors Service says its Aaa foreign currency country ceiling and Aaa government bond ratings and stable outlook are supported by the moderate government debt burden and the size and diversity of the economy. |
Federal debt ratios relative to GDP and to revenue -- which Moody's considers more relevant to the rating than the debt ratios at the general government level -- look set to improve modestly in the next few years despite budget deficits before deteriorating sometime in the next decade.
"The American economy has demonstrated its competitiveness through fairly rapid productivity growth, a high degree of technological innovation, and generally sound public finances," said Moody's Vice President Steven Hess, author of the report. "Taken together, these factors help support the Aaa foreign currency ceilings."
As the world's largest economy with flexible markets, an open foreign trade regime, and a high degree of capital mobility, he said, the US remains the center of global trade and finance. "As the anchor of international trade and finance with no restrictions on payments and no likelihood of their imposition, he said, the United States presents little payments risk to international investors.
"Subprime risks, while important to investors, are not affecting the government's rating," said Hess. "But, in the very long term, the rating could come under pressure if reform of Medicare and Social Security is not carried out as these two programs are the largest threats to the long-term financial health of the United States and to the government's Aaa rating."
More immediate economic challenges, but less grave from the perspective of credit ratings, include the downturn in housing and the subprime crisis, which are likely, said Hess, to result in a period of slower growth in coming quarters, although further interest rate cuts by the Federal Reserve could help to maintain positive growth.
"The budget deficit, which reached a low for the Bush Administration of 1.2% of GDP in the last fiscal year, could increase due to the subprime fallout and lower corporate profits," said Hess.
He said that real GDP growth in the third quarter was revised upward to an annual rate of 4.9% following a 3.8% rate in the second quarter, and net exports rose during the last two quarters of 2007 at their most rapid rate in a number of years. This indicates, he said, that the dollar's decline and relatively good global economic growth are beginning to turn the large US current account deficit around.