World Grows Jittery About American Debt

By Uri Friedman | January 28, 2011 11:22am

The U.S. received two stern warnings Thursday that it needs to get its fiscal house in order, and quickly.
Moody's, the credit rating agency, cautioned that it may need to downgrade its AAA-rating of U.S. debt sooner than expected, while the International Monetary Fund argued that America must tackle its mounting debt and confront thorny issues like entitlements if it wants to maintain its credibility in global markets. Moody's AAA rating is its top designation, but the agency pointed out that the U.S. has the highest ratio of government debt to government revenue of any AAA-rated country.

The rebukes came a day after a congressional projection placed this year's federal budget deficit at a post-World War II record of $1.5 trillion. It also came on the same day that another credit-rating agency, Standard & Poor's, downgraded Japan's bond rating from AA to AA- out of concern that the country isn't making a credible effort to control its spiraling debt. During his State of the Union address, President Obama proposed deficit-reduction measures like freezing domestic spending, but critics accused him of skirting the painful spending cuts or tax increases needed to truly rein in the national debt.

How seriously should we take the threats issued by Moody's and the IMF?

• Moody's Warning Could Spook Foreign Investors, notes Bloomberg's Christine Richard: "The threat of a lower rating may cause international investors to avoid U.S. assets. About 50 percent of the almost $9 trillion of U.S. marketable debt is owned by investors outside the nation."

• If Japan Was Downgraded, U.S. Could Be Next, maintains Time's Michael Schuman: "Anything you can say about Japan you can say about the U.S.--and more. Unlike Japan, the U.S. is not a creditor nation, nor does the populace save enough. Despite talk of a more conservative approach to spending, the U.S. has no credible plan for reining in its deficits and debt."

• U.S. Debt Will Be Downgraded, argues Douglas McIntyre at 24/7 Wall St: "The US is doomed to suffer a downgrade in its debt before its begins the hard work on restructuring Social Security, Medicare and Medicaid. A downgrade may not even be enough of a shock to bring Americans to their senses. They have paid for their entitlements and they believe they deserve them."

• Downgrade Unlikely But Potentially Disastrous, explains The Washington Post's Howard Schneider. The U.S. still has the world's largest economy and reserve currency, Schneider reminds us. Yet, "however unlikely, a downgrade in U.S. debt or loss of confidence in the government's ability to repay its creditors could touch off a catastrophic series of events--from a shutdown of global trade finance and credit to the collapse of banks and governments that hold large amounts of U.S. debt and depend on the flow of money through and from the United States to stay afloat."

• Nobody Pays Attention to Rating Agencies, counters Business Insider's Joe Weisenthal. He notes that the yen dropped after S&P's downgrade of Japan but 10-year Japanese government bonds hardly budged. "There's no evidence that the ratings agencies really understand sovereign debt dynamics," he says, "and the market understands this regarding the US, too, which is why despite endless squawking about the US FISCAL TRAINWRECK, nothing really happens."

• Can the U.S. Get Its Act Together? wonders John McDermott at The Financial Times. Moody's wants the U.S. to reduce its budget deficits, reform entitlements, and grow its economy over the next three years, "during which the two political parties will have to come together and arrive at a credible compromise that will involve painful concessions for each--and with a presidential campaign scheduled right smack in the middle."