The governments of the two
economies must balance bringing down their debt burdens without damaging growth
by removing fiscal stimulus too quickly, Pierre Cailleteau, managing director of
sovereign risk at Moody’s in London, said in a interview.
Under the ratings company’s
so-called baseline scenario, the US will spend more on debt service, as a
percentage of revenue this year than any other top-rated country except the UK,
and will be the biggest spender from 2011 to 2013, Moody’s said in a report.
“We expect the situation to
further deteriorate in terms of the key ratings metrics before they start
stabilising,” 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 US government will spend
about 7% of its revenue servicing debt in 2010 and almost 11% 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. Under its adverse scenario, which assumes 0.5% lower growth each year,
less fiscal adjustment and a stronger interest rate shock, the US will be paying
about 15% of revenue in interest payments, more than the 14% limit that would
lead to a downgrade to AA, Moody’s said. The UK is likely to spend 7% of revenue
servicing debt this year and 9% in 2013, rising to almost 12% under the adverse
scenario, Moody’s said. Financing costs above 10% put countries outside of the
AAA category into a so-called debt reversibility band, the size of which depends
on the ability and willingness of nations to reduce their debt burden by raising
taxes or reducing spending.
