The burden of debt

Worried about a change in the United States' AAA credit rating?

By MSN Money May 22, 2009 6:10PM

The dollar continued its slide against the euro, pound and yen today as investors weighed whether the United States might be the next country to be put on a negative credit watch by ratings agencies.


Standard & Poor's on Thursday lowered the United Kingdom's credit outlook to "negative" from "stable" because of the country's growing debt burden. For now, S&P maintained the nation's credit rating at AAA. But S&P said its warning was based on a projection that net U.K. government debt could approach 100% of national income.

Bill Gross, co-chief investment officer of bond firm Pacific Investment Management, told Reuters today that the prospect of the United States losing its AAA credit rating is suppressing all financial assets, including the dollar.


As the dollar has dipped today to new multimonth lows against rival currencies, Treasury yields hit fresh highs for the year. The yield on the benchmark 10-year rose to 3.465% today and the 30-year Treasury reached 4.398%.


Treasury Secretary Timothy Geithner told Bloomberg Television on Thursday that the Obama administration is committed to cutting the budget deficit to ensure that the U.S. keeps its AAA credit rating. Geithner fixed a target to reduce the gap to about 3% of gross domestic product, from a projected 12.9% this year. The U.S. has boasted a top-level triple-A credit rating since 1917. But the ongoing financial crisis threatens that streak.


Earlier this month, the administration raised its forecast for this year's federal deficit to $1.84 trillion.


Investors worry that rising debts would make it more costly for the governments to prop up ailing economies and bail out beleaguered companies. As the U.S. deficit grows, the government would be forced to borrow more, ratcheting up inflation pressures and eroding the dollar's purchasing power.


Through the early stages of the financial crisis, the dollar was viewed as the safest haven. But as the equities and commodities markets have stabilized, Treasurys have lost luster. And big holders of U.S. debt -- most notably China -- have become more vocal in criticizing U.S. policies that could kindle inflation and thereby erode the value of their Treasury holdings.


Credit ratings company Moody's this morning said that the credit rating for the United States remains AAA and stable, helping investors allay immediate fears about a downgrade hitting home. But Moody's cautioned that the rating is not guaranteed forever.


"Of course we are continuing to watch U.S. government finances, and there are some long-term threats to the U.S. government's financial position that we have to evaluate, but we don't see anything immediate," Steven Hess, lead analyst for the agency, said this morning.


President Barack Obama is not worried about a change in the United States' AAA credit rating, the White House said today.



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