MercoPress. South Atlantic News Agency

Moody’s warns about deterioration of sovereign triple-A ratings

Pierre Cailleteau, Moody's global head of sovereign ratings

Sovereign debt risk is rising globally, particularly in the United States and United Kingdom, which must outline plans to manage public debt or face ratings deterioration as soon as 2011, Moody's global head of sovereign ratings said this week.

“2010 is probably going to be a tumultuous year for sovereign risk,” Pierre Cailleteau, Moody's global head of sovereign ratings, said in a phone interview from London. “Long-term interest rates will rise globally, which will reveal the real costs of the financial and economic crisis.”0

Standard & Poor's on Monday cut Mexico's credit ratings by one notch to BBB, two levels above junk status, saying Mexico's strong links to the US economy may limit its growth prospects.

Ratings agency Fitch Ratings last week cut Greece's debt to BBB-plus, three levels above junk, citing fiscal deterioration in one of the 16-member Euro zone's most indebted member states.

While top ratings of the US and other developed nations do not face similar cuts, pressure has been building on those ratings, Moody's and Standard & Poor's have said over the past year.

“The ratings of the US and UK are not threatened, or at risk in 2010, but this will be the year where both the US government and the UK government will have to articulate a credible plan to address their problems of large debt,“ Cailleteau said in an interview.

”In the case of the UK and the US, they are losing altitude in the triple-A space,“ he said. ”If they don't react, if there is no policy response, the loss of altitude will be inexorable.“

Cailleteau said Moody's triple-A ratings ”are predicated on a strong policy response.“

”If there is not a policy response, then the rating will be under threat in the next two or three years“.

In a report released on Monday, Moody's said uncertainty over the pace and intensity of fiscal and monetary ”exit strategies“ will add to sovereign risk.

”Indeed, the only certainty is that the exit strategies will be fraught with a good deal of execution risk,“ the report said. ”In our view, the key policy challenge facing advanced economies is therefore to time the exit perfectly: not too quickly or too soon so as to prevent choking off growth; and not too slowly or too late so as not to unsettle financial markets.”

According to the report during 2009 many governments believed they could decide on the exit calendar: reacting to the crisis; announcing future plans and finally implementing those plans. However the context is different: lower growth than expected and without the benefit of the low interest rates tail wind, as in the recent past, but with the need of balancing finances in the coming years.

Some of the risks involved include an “abrupt increase” in long term interest rates, following a period of low rates which made sovereign debt more manageable.

“Therefore, according to Moody’s, it is most probable that governments will not have the luxury to wait until 2012 to begin improving public finances”.