Britain and US in danger of losing 'Aaa' credit rating, says Moody's
Published 16/03/2010 | 05:00
A warning that Britain and the US have moved "substantially" closer to losing their top "Aaa" credit ratings came from ratings agency Moody's Investors Service yesterday.
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.
Under Moody's baseline scenario, Britain and US will spend more on debt service as a percentage of tax than any other AAA country, with the US facing the biggest burden from 2011 to 2013.
"We expect the situation to further deteriorate in terms of the key ratings metrics before they start stabilising," Mr Cailleteau said. "This story is not going to stop at the end of the year."
Under its adverse scenario, which assumes 0.5pc lower growth each year, the US will be paying about 15pc of revenue in interest payments, more than the 14pc limit that would lead to a downgrade to AA, Moody's said. The UK's forecast of 9pc of revenues debt cost by 2013 would rise to almost 12pc under the adverse scenario.
"Those economies have been caught in a crisis while they are highly leveraged," Mr Cailleteau said. "They have to make the required adjustment to stabilise markets without choking off growth."
"On balance, we believe that the ratings of all large Aaa governments remain well positioned, although their 'distance-to-downgrade' has in all cases substantially diminished," Moody's said.
Sterling was trading below $1.50 and 91p to the euro yesterday after an opinion poll pointed to a hung British parliament after this year's election, and house prices rose in March by the smallest amount for the month on record.
The currency markets expect further falls. Futures trades on the pound weakening against the dollar outnumber those betting on a rise by eight times more than when George Soros made $1bn betting against the currency in 1992.
"The risk of a UK double dip is substantial," said Hans-Guenter Redeker, the bank's head of foreign-exchange strategy in London. "Sterling is increasingly trading like an emerging-market currency."
However, the median prediction by 35 analysts in a Bloomberg report sees a 4.9pc gain for sterling to $1.59 -- although this is less than a similar survey in January.