Moody's keeps the Aaa rating pressure on the U.S. and U.K.

As debt mounts in both the U.S. and U.K., the drums are getting a bit louder at Moody's. The credit rating agency is warning both countries to get their debt under control. Yet only under the most pessimistic scenario does the agency think the U.S. could possibly lose its top rating by 2013.

In its latest report, Moody's looks at the 17 countries with its highest Aaa rating and lets those on the edge know that improvement in debt management should start in the next two years.

"The next year or two will show whether growth potential has been structurally eroded or whether a robust yet sustainable recovery is possible," says Pierre Cailleteau, the London-based 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."

The U.S. debt burden will climb to 97.5% of GDP next year versus 87.4% this year, according to a June forecast by the Organization for Economic Cooperation and Development. U.S. debt rose to $7.17 trillion in November. The OECD estimates that the U.K's public debt will rise to 89.3% of GDP by 2010. It was 75.3% in 2009.

Resistant Is Better Than Resilient

Moody's separated countries into two categories in the report: resilient and resistant. The U.S. and U.K. were deemed resilient because their public finances are deteriorating and may test the boundaries of the Aaa rating. But Moody's did say both countries had an "adequate reaction capacity to the rise to the challenge and rebound." Resistant countries are in a much stronger position. They include Canada, Germany and France.

Moody's also believes the U.S. has advantages over the U.K. Even though the amount of federal government debt outstanding is rising sharply, interest payments as a percentage of government revenue declined to 8.4% from 10% because investor demand for U.S. Treasury bonds and bills remains strong. So right now, the U.S. is borrowing cheaply.

But will the U.S. continue to find support for its bonds and bills? Global banks are moving away from the dollar, and if that continues, the U.S. will have a harder time borrowing cheaply. Moody does expect the U.S. interest-to-revenue ratio to climb to 13% by 2012, but it could go as high as 18% in the worst-case scenario. The last time it hit that level was in the 1980s.

Only One Triple-A Dropout So Far

Despite the challenges, Cailleteau believes the 17 Aaa-rated countries retain the characteristics necessary for their rating even though they have "lost altitude" in the Aaa category. The key characteristic for all the governments is their financial strength or the future trajectory of debt and its affordability. Only Ireland lost its Aaa rating this year. The other 17 Aaa-rated countries include Austria, Australia, Denmark, Finland, Luxembourg, Netherlands, New Zealand, Norway, Switzerland, Singapore, Spain and Sweden.

While the U.S. and the U.K. clearly need to get their debt levels under control, their risk of losing their Aaa rating appears remote. As long as economic recovery takes hold in both countries, that is.

Lita Epstein has written more than 25 books including Reading Financial Reports for Dummies and The Complete Idiot's Guide to Foreign Currency Trading.

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