Moody’s Says World Has ‘No Credible Alternative’ to U.S. Dollar

By Keiko Ujikane and Jason Clenfield

June 24 (Bloomberg) -- Moody’s Investors Service said the dollar’s unchallenged status as the world’s reserve currency is supporting U.S.’s Aaa credit rating even as the nation’s budget deficit is set to quadruple this year.

“In the absence of a credible alternative it’s hard to see abrupt changes and that’s not even in the interest of the creditors,” Pierre Cailleteau, managing director of sovereign risk at Moody’s, said in an interview in Tokyo yesterday. The credit rating “remains solid,” he said earlier at a briefing.

The fiscal health of the world’s largest economy has come under scrutiny by its creditors as bailouts and stimulus plans swell a budget deficit forecast to soar to a record $1.85 trillion this year. China and Russia, the largest and third- largest foreign holders of the debt, have said they may diversify some of their reserves.

Even if the U.S.’s ratio of debt to gross domestic product were to exceed 100 percent, more than double the current level, the country’s rating would still be secure as long as borrowing costs stay low, Cailleteau said. Moody’s estimates the ratio will rise to 59.9 percent this year from 40.8 percent.

“In the U.S., interest rates are low because the debt is issued in its own currency and the currency happens to be the international reserve currency,” he said.

Yields on benchmark 10-year Treasuries have risen to 3.63 percent since touching a record low 2.04 percent in December. They rose to their highest level since October this month after Alexei Ulyukayev, first deputy chairman of Russia’s central bank, said on June 10 his country may switch some of its Treasury holdings to International Monetary Fund bonds.

Guarantee Safety

China, which in March called for the U.S. to guarantee the safety of China’s assets, is still buying Treasuries. Premier Wen Jiabao’s government has increased its holdings of the securities by almost a quarter to $763.5 billion since the onset of the global credit crisis in September, according to U.S. Treasury data.

“The question you have to ask is: What does it mean to be a safe haven in the end?” Cailleteau said. “The test is that when you have a big problem, either in the economy or if you have the threat of a war, where do you think people are going to put their money?”

Policy makers have indicated there is no replacement for the dollar. Russian Finance Minister Alexei Kudrin said on June 13 that “it’s too early to speak of an alternative.” Japanese Finance Minister Kaoru Yosano, whose government is the largest holder of Treasuries after China, this month said the dollar should remain the world’s reserve currency.

Fiscal Discipline

U.S. President Barack Obama has said that it is important his nation maintains fiscal discipline to ensure investors keep buying Treasuries. He plans to cut the deficit by half before the end of his first term.

“Even if he’s wrong, even if he’s too optimistic, that doesn’t necessarily meant we’ll have to act,” Cailleteau said. “The U.S. started the crisis in pretty good shape in terms of government finances.”

The global recession has put pressure on economies and government budgets around the world, forcing Moody’s to reconsider the credit quality required by the ratings, Cailleteau said.

“It’s a scale that is anchored on the Aaa rating and the Aaa anchor is drifting. Most Aaa governments are affected,” he said, adding that the U.S is “losing altitude” in the top range.

To contact the reporter on this story: Keiko Ujikane in Tokyo at kujikane@bloomberg.net; Jason Clenfield in Tokyo at jclenfield@bloomberg.net