The ratings agency says it is very likely that most governments will not have the luxury to wait until 2012 to start cleaning up public finances and in 2010 many nations will be forced to bring in policies and make tactical changes in debt management strategies that reduce national debts and ultimately retain AAA ratings.
Moody’s global head of sovereign and supranational Pierre Cailleteau says: “A key concern is naturally an abrupt increase in real long-term interest rates after a long period of very low yields which has enhanced public debt affordability.
“In fact, all the headwinds that constrain economic recovery in mature economies suggest that growth is unlikely to solve the problem. Most advanced economies will need to consolidate as much as is needed for them to keep debt at affordable levels – which in turn will slow down the rebound.”
In his report, Cailleteau illustrates the potential risk of downgrade with a “misery index”, pitting forecasted 2010 national fiscal deficits against potential 2010 unemployment figures – Spain and Latvia are the most at risk according to Moody’s, but the UK and the USA score highly, nestled between Ireland, Greece and Iceland
He says: “We believe the index is a good measure of the challenges facing some economies in the coming decade.”
Cailleteau says the biggest barometer for downgrade risk is the loss of “shock-absorption capacity” within a nation’s finances as debts increase.
He says: “Many AAA governments, starting with the UK and the US, cannot afford another financial crisis at current rating levels. This is another reason why the reform of the financial sector has taken on such importance.”