U.S. Credit at the Brink

Even though the U.S. and Britain retain their AAA rating for the moment, Canada, France, and Germany already are considered stronger currencies.

Image: Portfolio

At about the worst possible time, Moody’s Investors Service today raised a frightening specter—that the rising levels of public debt tarnish the Holy Grail of the U.S. bond market, the nation’s AAA credit rating.

The good news is that the AAA sovereign ratings of the United States and Great Britain are not vulnerable. The bad news is that they just aren’t as quite as good as they could be and only merit the top rating “more because of their balance-sheet flexibility than because of their current or projected debt levels over the next few years," according to MarketWatch.com. Both countries may “test the boundaries” of the top rating because of the ongoing woes in public finance, says Pierre Cailleteau, managing director of the sovereign risk group,

Cailleteau said in a report that the two countries have “resilient” AAA ratings, which is not quite as good as the “resistant” top ratings given to Canada, France, and Germany. "These are the AAA countries whose public finances are deteriorating considerably and may therefore test the Aaa boundaries, but which display, in our opinion, an adequate reaction capacity to rise to the challenge and rebound," he said.

What makes Cailleteau’s comments jarring is that, in the dainty parlance of bond-rating agencies, it is the equivalent of a slap in the face. As defined by Moody’s, resilient translates into something resembling ”beleaguered.”

The U.S. and Britain are likely to remain in ratings hot water as long as their public debt levels remain so high—with deficits equaling 12 percent of gross domestic product for Britain and 10 percent for the U.S.

Word of the Moody’s finger-wagging couldn’t come at a worse time for the Obama administration, which is in the middle of a politically fraught push in Congress for health care reform, which is likely to push up the deficit even further. Oh, and then there is the little matter of a 30,000 troop increase in Afghanistan. Particularly if Standard & Poor’s and the other credit raters follow suit, this will give ammunition to Republicans in Congress and “tea party” antispending activists.

Weakness in the U.S. and British sovereign ratings also won’t do the stock market much good. The market was down today as the credit raters downgraded the debt of Greece and Dubai. Investors fled to dollar investments, which seem safe—for the moment.