The United States and Britain must take action soon to get their public finances in order if they want to avoid threats to their top triple-A credit ratings, a leading credit ratings agency said Tuesday.
In an assessment of eight triple-A countries, Moody's Investors Services said the public finances in both countries are deteriorating considerably and may therefore "test the Aaa boundaries" in the future.
Both the U.S. and Britain are considered to have "resilient" triple-A ratings, according to Moody's, against the more solid "resistant" top ratings for the others it has assessed in its quarterly report — Germany, France, Canada, Switzerland, Luxembourg and New Zealand.
However, Moody's said both the U.S and Britain have an "adequate reaction capacity" to rise to the challenge.
Moody's report comes a day before British finance minister Alistair Darling delivers his latest projections about the country's debt — Darling has all but admitted that his most recent forecasts were way too optimistic as the recession proved to be longer and deeper than anticipated.
Analysts expect that he will predict that Britain will end up borrowing a staggering 190 billion pounds ($310 billion) in fiscal year 2009-10, which is equivalent to over 13 percent of the country's gross domestic product and announce the beginnings of a strategy to bring the public finances into shape over the medium-term.
Meanwhile in the U.S., the deficit for the 2009 budget year which ended in September hit a record $1.42 trillion, or just under 10 percent of GDP. The administration in August projected a slightly higher deficit for the current year. However, there are mounting hopes that the projected cost of the government bailout program will be around $200 billion less than anticipated, easing some of the fiscal pressures.
Overall, Moody's said all 17 triple-A countries have seen pressure on their finances, but that none faces an "immediate" threat to their ratings.
"The next year or two will show whether growth potential has been structurally eroded or whether a robust yet sustainable recovery is possible," said Pierre Cailleteau, managing director of Moody's sovereign risk group and lead author of the report.
"Next year, Aaa governments with stretched balance sheets will find themselves under pressure to announce credible fiscal plans and, if markets start losing patience, to start implementing them," he said.
Moody's said the pace and sustainability of the economic growth and the path of interest rates will be key if countries can manage their significant debt burdens that have built up as they increased spending in the recession and bailed out banks, while the slow economy dried up tax revenues.