Out of Control Policy Blog

Moody's: Deficits Jeopardize U.S. Government's Aaa Bond Rating

Following up on this post yesterday, this article from the Sydney Morning Herald caught my eye:

Moody's Investors Service Inc. said the US government's Aaa bond rating will come under pressure in the future unless additional measures are taken to reduce budget deficits projected for the next decade.

The US retains its top rating for now because of a "high degree of economic and institutional strength," the New York- based rating company said in a statement today. The ratios of government debt to the U.S. gross domestic product and revenue have increased "sharply" during the credit crisis and recession. Moody's expects the ratios to remain higher compared with other Aaa-rated countries after the crisis. [...]

"If the current upward trend in government debt were to continue and become irreversible, the rating could come under downward pressure," said analysts led by Steven A. Hess, senior credit officer at Moody's in New York.

How the government handles the credit crisis and recession without impairing its balance sheet and the economy's ability to rebound will be main issues to consider in the ratings, the report said.

In other words, the Federal government is moving in the wrong direction on fiscal, tax and economic policy, which is beginning to erode what was once a rock-solid trust in its creditworthiness on the part of the capital markets. And these guys have been pretty tolerant of the patterns of Federal fiscal irresponsibility we've seen in recent decades—so you know it's getting really bad when the markets quietly start sounding the alarm.

To that point, Arizona Republic columnist Bob Robb is right in pointing out today that the latest Obama budget effectively sets a new—and much higher—baseline for federal spending, with no draw-down in sight even after the economy recovers.

Of course, the ratings agencies take a much more favorable view of governments that take their fiscal crises and debt seriously. See Louisiana on that point, which was the only state to receive a credit rating upgrade from Fitch last year. Why? Due to its focus on streamlining and budget reforms.

It would seem that there's a lesson there for policymakers in DC, but I won't hold my breath waiting for them to learn it.

(Hat tip: Americans for Limited Government)

Leonard Gilroy is Director of Government Reform


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