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Global Credit Research - 15 Mar 2010
London, 15 March 2010 -- The ratings of all Aaa governments are currently well positioned despite
their stretched finances, says Moody's Investors Service in
the third issue of its quarterly Aaa Sovereign Monitor.
Moody's new report provides an update about the situation of the
four largest Aaa governments -- Germany, France, the
UK and the US -- as well as other selected Aaa countries: Spain
and the less fiscally challenged Denmark, Finland, Norway
and Sweden. In its examination of these countries' unchanged
creditworthiness, Moody's identifies the key challenges facing
them.
The recovery that has taken hold across the global economy remains fragile
in several of the large advanced economies, most of which have also
implemented the most aggressively expansionary fiscal and monetary policies.
"This exposes governments to substantial execution risk in the implementation
of their exit strategies, which could yet make their credit more
vulnerable," says Arnaud Marès, Senior Vice President
in Moody's Sovereign Risk Group and the main author of the report.
However, debt affordability -- i.e. the ratio
of interest payments to government revenues -- indicates that the
ratings of all Aaa governments remain well positioned, despite the
reduction in their 'distance-to-downgrade' and
the widening of tail risk
One of the report's key conclusions is that the Aaa ratings of the
UK and the US, whose debt affordability is currently the most stretched,
continue to be supported by substantial 'debt reversibility'.
A special section at the end of Moody's new report elaborates on
the concept of debt reversibility, which addresses the extent to
which a government is able to repair its balance sheet after a shock.
"In light of the muted recovery, discretionary fiscal adjustment
is now the principal means of repairing the damage that the global crisis
has inflicted on government balance sheets," says Pierre Cailleteau,
Managing Director of Moody's Sovereign Risk Group. "A key
issue is whether governments are able and willing to implement such unprecedented
adjustments. Growth will support some governments' adjustment
plans more than those of others, but no government can rely on it,"
adds Mr. Cailleteau.
Aaa governments also face a delicate balancing act with respect to the
timing of these fiscal adjustments: tightening fiscal policy before
private demand has become self-sustained could risk undermining
the recovery, and thereby damage governments' power to tax.
However, postponing fiscal consolidation much longer is no less
risky, as it would test the patience of the market -- and could
force central banks to take the initiative. "At the current elevated
levels of debt, rising interest rates could quickly compound an
already complicated debt equation, with more abrupt rating consequences
a possibility," indicates Mr. Cailleteau.
"Given the heightened market tensions surrounding sovereign debt,
the ability of Aaa governments to anchor fiscal expectations -- such
as through the provision of detailed consolidation programmes or the introduction
of formal rules -- will be key to avoiding the risks associated with
postponing fiscal consolidation", says Mr. Marès.
In Moody's view, Spain recently became the first Aaa government
to rise to this challenge when faced with meaningful market pressure to
announce such measures, although its adjustment process will undoubtedly
be drawn out and painful. Other large Aaa governments are not immune
to facing the same pressure in the coming months.
This third issue of the Aaa Sovereign Monitor also focuses on the Nordic
countries, three of which had previously faced severe economic and
financial crises in the early 1990s. These countries entered the
current crisis in a much stronger position, with robust, more
competitive and more diversified economies as well as healthier public
finances. Importantly, all of the mainland Nordic countries
had established a track record of fiscal prudence in pre-crisis
years. "The ample fiscal space created before the crisis and high
degrees of debt affordability therefore provide robust protection for
the Nordic countries' Aaa ratings," says Kristin Lindow,
Moody's Regional Credit Officer (Europe/Africa) in the Sovereign Risk
Group.
Moody's Aaa Sovereign Monitor is available to Moody's subscribers at www.moodys.com
London
Pierre Cailleteau
Managing Director
Sovereign Risk Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
****
NOTE TO JOURNALISTS ONLY: For more information please contact New
York Press Information +1-212-553-0376;
EMEA Press Information in London +44-20-7772-5456;
Juan Pablo Soriano in Madrid +34-91-310-1454;
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Petr Vins in Prague +4202 2422 2929; Tokyo Press Information
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Lim in Sydney +612 9270 8102; Luiz Tess in São Paulo
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City +5255-1253-5700; Daniel Rúas in Buenos
Aires +54 11-4816-2332 ext. 105; Leon Claassen
in Johannesburg +27-11-217-5470; Jehad
el-Nakla in Dubai +971 4 401 9536; or visit our web site
at www.moodys.com
New York
Kristin Lindow
Senior Vice President
Sovereign Risk Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
London
Arnaud Mares
Senior Vice President
Sovereign Risk Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Moody's: Aaa government ratings remain well positioned despite fragile recovery
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