Credit ratings agency Moody’s has warned that the Aaa credit rating of top developed nations like the U.S., Germany, U.K., and Spain could be under threat as their deficits go out of control.
Moody’s has published a new report on the creditworthiness of these countries and has come out with a gloomy picture. Although it said that currently the ratings are stable and there is no immediate risk of downgrades, it warned that countries like the United States are much closer to downgrades now than they were before the financial crisis.
A downgrade in a country’s credit rating can be a significant blow to its finances as the interest rate at which it can borrow from the international markets goes up. Moody’s had cut Japan’s Aaa rating to Aaa2 last year after concerns that Japan’s debt situation was worsening.
The U.S. government has provided a number of packages to stimulate the economy since the recession struck These measures have resulted in huge increases in government’s debt, which now stands at almost 65 percent of GDP, while deficit has crossed 10% of GDP. These numbers are clearly bothering some investors and Moody’s has summed up the mood of the market with its warning.
Moody’s also said that developed countries might not be able to get out of this situation simply by boosting growth. The debt numbers have reached such high levels that it would take significant cuts in government spending to get things back on track. This could mean measures like those launched recently by Greece, such as salary cuts for public sector employees and lesser government incentives. These measures have led to widespread unrest and general strikes that have paralyzed the country. Moody’s said that similar measures, which might be necessary soon in the leading countries, will even test the social cohesion of those countries.
The government is currently stuck in a tricky situation. On the one hand, there have been calls for more stimulus packages so that the economic recovery can be sustained and the unemployment level can be brought down. At the same time, any additional spending on the part of the government would further increase its deficit, not only risking a ratings downgrade but also compromising the long term health of the economy.
The Obama administration and the Federal Reserve will have to do a balancing act in the next few months to get the economy back to a comfortable zone, and it’s not going to be easy.