The First Shot Across The Bow At Aaa-Rated US And UK
In addition to having become the biggest joke on trading desks the world over, the AAA rating of both the US and the UK is now starting to bother Buffett baby (soon to be step child) Moody's. It's "Aaa Sovereign Monitor" released today is all about the cautionary language that we have grown to love and expect from the toothless rater. This time however, it is what is between the lines that is most substantial: while Moody's will never go ahead and directly downgrade the U.S. for fear of the mutually assured apocalypse such an action would create (or so Blankfein and Bernanke tell us), an exhaustive read of this report indicates that Moody's thinks the U.S. and the U.K. deserve to be anything but AAA.
From the report:
The global economy has stabilized and is recovering from the recession. Eastern Asia (including Aaa-rated Singapore) is recording the most rapid recovery. Three of the four largest Aaa-rated countries that are covered in this Monitor also recorded positive growth in Q3. Indeed, the US and the Eurozone as a whole reported increases in real GDP, although the Eurozone’s rate of increase was not impressive. However, the UK economy continued to decline. Figures are not yet available for all other countries, but it appears very likely that Australia’s growth was sustained, and Canada eked out a small positive increase during the quarter.
Nevertheless, questions remain about the durability of the recovery. The effects of the financial crisis and global downturn on the fiscal and debt positions of Aaa governments are still unfolding and likely to be long-lasting. Moody’s considers government financial strength – i.e. the future trajectory of the government’s debt and its affordability – to be the primary and currently most crucial rating consideration for Aaa-rated sovereigns. We believe that the other rating factors – economic and institutional strength as well as susceptibility to event risk – continue to be supportive of the Aaa ratings of the 17 countries in this category.
Over the next year or two, the extent of the sustainability and strength of the recovery will become apparent.
The questions we will be seeking to address are as follows:
- How much of the recent return to growth was due to the stimulus spending by governments and their expansive monetary policies?
- If the stimulus is removed, will growth be sustainable?
- Has the crisis lowered the growth trend of some Aaa economies for an extended period?
The answers to these questions, in addition to actual fiscal policies, will be important in determining how and whether governments can achieve fiscal consolidation or reverse their debt trajectories.
So, while the macroeconomic and financial-system crises may be close to an end, the fiscal crisis in a number of Aaa-rated countries continues and will last for several years. In 2009, Moody’s has downgraded only one Aaa government: Ireland. The lack of rating actions on other Aaa countries indicates that, while most of these countries have “lost altitude” within the Aaa space, they retain the characteristics necessary for a Aaa rating.
These characteristics include, among others, a high degree of “debt financeability,” “debt affordability,” and “debt reversibility”. Moody’s approach to measuring debt financeability – i.e. the ability to raise debt without it substantially affecting the cost of the debt – is the subject of a special section (page 21).
Debt affordability – which is best represented by the ratio of interest payments to government revenue – is one of the biggest uncertainties going forward. In the graphs on individual Aaa countries shown over the following pages, we have illustrated a range of possible outcomes for this ratio. Under some scenarios, this ratio could reach problematic levels in the next few years in some countries. However, under the baseline scenario, we still believe that the trajectory of the debt metrics, while unfavourable in the near term, does not currently threaten the ratings.
The countries covered in this issue include the largest four Aaas – France, Germany, the United Kingdom and the United States – which will feature in every issue of this quarterly publication. In addition, we have shorter sections on four other Aaa countries: Austria, Luxembourg, Switzerland and New Zealand.
Overall, the European countries are characterized by potential contingent liabilities from their banking systems. Indeed, Luxembourg and Switzerland have very large banking systems in relation to their economic size. Moreover, the exposure of Austrian banks to Eastern Europe caused some concern at the height of the crisis and may not have fully materialized yet. In the southern hemisphere, meanwhile, New Zealand’s banks are mainly owned by strong foreign banks, but the size of the country’s (and the banks’) external liabilities have also raised questions, now considerably alleviated, about the government’s contingent liability. It is worth noting that Moody’s maintains negative outlooks on the banking systems of Austria, Luxembourg, and New Zealand, reflecting uncertainty over possible losses and, therefore, the size of the contingent liability. This is also the case with many other countries globally, although Switzerland’s system still has a stable outlook.
Full report attached for your Moody's mea culpa consideration.