U.S. Debt shock may hit as soon as 2013 says Moody’s

Under the Obama budget, interest would top 18% of revenue in 2018 and 20% in 2020, according to CBO estimates. However, according to IBD, under more adverse scenarios than the CBO considered, including higher interest rates, Moody’s projects that debt service could hit 22.4% of revenue by as soon as 2013.

“While we see limited risk of a U.S. sovereign debt downgrade in the next 2-3 years, beyond that we cannot be so certain,” wrote Societe Generale’s economics team in a recent report.

The Moody’s ratings framework is one that could have a significant influence on policy — particularly in a crisis.

Because debt levels and interest rates can’t be lowered overnight, the obvious way of staying within the AAA limits set by Moody’s would be to raise revenue.

“It would bias the remedy in favor of tax increases for countries that want to improve their bond rating,” said Brian Riedl, budget analyst at the conservative Heritage Foundation.

Because economic growth is a key to fiscal health, Riedl argues that a ratings agency concerned about whether bondholders are repaid should bias spending cuts over tax increases.

Moody’s says that its framework focuses on debt affordability rather than debt levels as a percentage of GDP. “The higher this ratio (interest/revenue), the more public debt constrains the formulation and delivery of other policies,” Moody’s analysts wrote in March.

No TweetBacks yet. (Be the first to Tweet this post)

May 9, 2010 · Filed Under General Politics


Comments