Ĉmeric
02-13-2009, 10:45 PM
NEW YORK, Feb 12 (Reuters) - The "AAA" credit ratings of both the United States and Great Britain are "being tested" by the strains facing the global economy, while countries such as Germany, France and Canada are proving more resistant, Moody's Investors Services said on Thursday.
The cost of protecting debt issued by the British government against potential default spiked to an all-time high on Thursday after Moody's comments.
Moody's said it had split up "AAA" sovereign countries into three categories, depending on their various abilities to withstand the current crisis, with Ireland and to a lesser extent Spain proving the weakest of the bunch.
The United States and the United Kingdom fell somewhere in the middle.
"This group comprises the U.S. and the UK, whose ratings are being tested because of the shock to their growth model and because of very large, in some cases, contingent liabilities," said Pierre Cailleteau, chief international economist at Moody's told investors and reporters on a conference call.
"However, in our opinion, these countries display an adequate reaction capacity to rise to the challenge."
The global economy has been brought to a near standstill by a crisis caused by excessive debt in the banking sector.
Countries that were more indebted because their financial institutions took greater risks appeared to be headed in the wrong direction.
This was especially the case for Ireland and Spain. "These are countries that are forced to take risks with their public finances," Moody's said.
"Resistant" countries, those in the strongest financial position, included Germany, France, Canada and the nations of Scandinavia, "whose ratings have so far been largely untested despite strong headwinds."
Analysts said the Moody's statement was a polite way of saying that the pristine "AAA" rating, which underlies and underpins the entire financial strength of the world's largest economy, was at risk.
"I think it's already in question," said Bruce Zirinsky, co-chair of the business reorganization and bankruptcy practice group at Greenberg Traurig LLP.
Anthony Schnelling, a managing director at Bridge Associates, said other governments and investors worldwide are becoming less willing to consider the United States as a safe haven.
As they increasingly question the U.S. "AAA" rating, that may lead to less investments in the United States, and investors may look elsewhere, such as China, as a source for stability, he said.
"How long is the rest of the world going to let us do this?" asked Schnelling. "What is the engine of the U.S. economy? The consumer keeps spending with no ending in sight (but now) we don't have consumer spending."
Such concerns were already being expressed in financial markets, where the cost of insuring U.S. Treasury bonds has jumped more than 80-fold from virtually nil since the crisis started.
Still some analysts noted than an outright default was actually impossible, since the United States only owes money in dollars and could therefore simply print cash. In that case, inflation would be the more likely outcome.
"The U.S. is not going to default. It's silly," said Joseph LaVorgna, chief U.S. economist at Deutsche Bank Securities. "The U.S. was, at its peak, roughly almost 30 percent of world GDP. The U.S. may inflate its way out of its debt obligations, but it will not default on its debt obligations."
Debt protection costs for British gilts came under pressure on Thursday.
Five-year UK sovereign credit default swaps climbed to a record 148 basis points on Thursday, up from 127.4 basis points late Wednesday, according to CMA Datavision.
That means it costs $148,000 a year to protect $10 million of UK government bonds for five years.
Source (http://www.reuters.com/article/companyNewsAndPR/idUSN1227158320090212?pageNumber=2&virtualBrandChannel=0)
The cost of protecting debt issued by the British government against potential default spiked to an all-time high on Thursday after Moody's comments.
Moody's said it had split up "AAA" sovereign countries into three categories, depending on their various abilities to withstand the current crisis, with Ireland and to a lesser extent Spain proving the weakest of the bunch.
The United States and the United Kingdom fell somewhere in the middle.
"This group comprises the U.S. and the UK, whose ratings are being tested because of the shock to their growth model and because of very large, in some cases, contingent liabilities," said Pierre Cailleteau, chief international economist at Moody's told investors and reporters on a conference call.
"However, in our opinion, these countries display an adequate reaction capacity to rise to the challenge."
The global economy has been brought to a near standstill by a crisis caused by excessive debt in the banking sector.
Countries that were more indebted because their financial institutions took greater risks appeared to be headed in the wrong direction.
This was especially the case for Ireland and Spain. "These are countries that are forced to take risks with their public finances," Moody's said.
"Resistant" countries, those in the strongest financial position, included Germany, France, Canada and the nations of Scandinavia, "whose ratings have so far been largely untested despite strong headwinds."
Analysts said the Moody's statement was a polite way of saying that the pristine "AAA" rating, which underlies and underpins the entire financial strength of the world's largest economy, was at risk.
"I think it's already in question," said Bruce Zirinsky, co-chair of the business reorganization and bankruptcy practice group at Greenberg Traurig LLP.
Anthony Schnelling, a managing director at Bridge Associates, said other governments and investors worldwide are becoming less willing to consider the United States as a safe haven.
As they increasingly question the U.S. "AAA" rating, that may lead to less investments in the United States, and investors may look elsewhere, such as China, as a source for stability, he said.
"How long is the rest of the world going to let us do this?" asked Schnelling. "What is the engine of the U.S. economy? The consumer keeps spending with no ending in sight (but now) we don't have consumer spending."
Such concerns were already being expressed in financial markets, where the cost of insuring U.S. Treasury bonds has jumped more than 80-fold from virtually nil since the crisis started.
Still some analysts noted than an outright default was actually impossible, since the United States only owes money in dollars and could therefore simply print cash. In that case, inflation would be the more likely outcome.
"The U.S. is not going to default. It's silly," said Joseph LaVorgna, chief U.S. economist at Deutsche Bank Securities. "The U.S. was, at its peak, roughly almost 30 percent of world GDP. The U.S. may inflate its way out of its debt obligations, but it will not default on its debt obligations."
Debt protection costs for British gilts came under pressure on Thursday.
Five-year UK sovereign credit default swaps climbed to a record 148 basis points on Thursday, up from 127.4 basis points late Wednesday, according to CMA Datavision.
That means it costs $148,000 a year to protect $10 million of UK government bonds for five years.
Source (http://www.reuters.com/article/companyNewsAndPR/idUSN1227158320090212?pageNumber=2&virtualBrandChannel=0)