Moody’s Says U.K., Spain to Retain Top Credit Ratings

By Shamim Adam

Sept. 9 (Bloomberg) -- The U.K. and Spain are unlikely to lose their top credit ratings even after being “severely hit” by the global economic crisis, Moody’s Investors Service said.

Germany and France, other Aaa-rated countries which had been more affected by the crisis than Moody’s expected, remain “resistant,” Pierre Cailleteau, managing director of sovereign risk at the ratings company, said in a statement today. The U.S. doesn’t face any “downward rating pressure” in the next few years even as its balance sheet expands, Moody’s said.

The global economy is emerging from the worst recession since the 1930s, supporting governments’ decisions to increase debt levels to finance spending. Officials from the Group of 20 nations this month expressed caution on the world economic outlook and judged it premature to start unwinding record-low interest rates and about $2 trillion in fiscal stimulus.

“Almost all Aaa-rated sovereigns have been hit more severely by the global downturn than we expected earlier this year,” Moody’s said. “Nevertheless, all Aaa countries now have stable outlooks, indicating that we do not expect rating downgrades over the near term.”

At least 17 economies are rated Aaa by Moody’s. In July, it lowered its top credit rating on Ireland by one step to Aa1, citing the country’s rising debt burden and a “sudden and brutal economic and financial adjustment.”

‘Irreversible Deterioration’

“Although highly unlikely, it is conceivable that a large and wealthy economy could lose its Aaa rating if it were to experience a material and irreversible deterioration in its debt conditions over the next five years or so, following the fate of Japan in the 1990s,” Cailleteau said.

Japan lost its Aaa credit rating in November 1998 as Moody’s said government efforts to spend its way out of recession had proven costly and ineffective. In May this year, the company unified the foreign- and local-currency debt rating for Asia’s largest economy at Aa2. Japan’s public debt is now nearing 200 percent of gross domestic product.

Standard & Poor’s this year cut its ratings for Ireland, Greece, Portugal and Spain following the economic slump.

Moody’s categorizes its Aaa-rated economies as resistant, resilient or vulnerable. Resistant countries are ones which started the crisis from a robust financial position and aren’t undergoing lasting changes to their economic models, it said, pointing to Canada as an example.

Resilient, Vulnerable

Resilient economies are those that “test the Aaa boundaries” because public finances are deteriorating considerably even as their balance sheet flexibility allows them to retain their ratings, Moody’s said. Those classified under vulnerable have public finances that “seem to be stretched to the point of no return in the Aaa category,” the report said, citing Ireland.

Spain’s rating is more resistant than vulnerable, Moody’s said. It is a “safe distance” from being downgraded because growth will be better than expected, the company said.

“Spain entered the global financial crisis with relatively low debt,” Moody’s said. “Even though it is running large budget deficits due to both explicit fiscal easing and automatic stabilizers, it is likely to exit the crisis with, at most, a middling debt level.”

The U.K. and the U.S. have “lost altitude” in their ratings even as they remain resilient, Moody’s said. S&P in May lowered its outlook on Britain to “negative” from “stable” and said the nation faces a one-in-three chance of a ratings cut as debt approaches 100 percent of GDP.

Budget Deficit

In the U.S., the government and the Federal Reserve have spent, lent or committed more than $12 trillion in a bid to revive the economy and credit markets. The budget deficit is projected to reach $1.6 trillion this year and $1.4 trillion in 2010, according to the nonpartisan Congressional Budget Office.

“The U.K. and the U.S. are showing signs of recovery,” the Moody’s report said. “However, to retain their ‘resilient’ status, the U.K. and U.S. will need to severely adjust their fiscal policies, even in the unlikely event of a vigorous rebound in their economies.”

U.K. Chancellor of the Exchequer Alistair Darling predicts the budget deficit will reach 175 billion pounds ($290 billion), or 12.4 percent of GDP, in the year through March 2010, the biggest shortfall since World War II.

“We assume that the adjustment to the U.K.’s public finances that is likely to take place in the context of the forthcoming elections, probably through cuts in spending, will keep the debt trajectory within Aaa boundaries,” the Moody’s report said. “Broad acceptance among the public of the inevitability of cuts in government expenditure and tax increases suggests such consolidation is at least possible.”

To contact the reporter on this story: Shamim Adam in Singapore at sadam2@bloomberg.net