United Kingdom
The United Kingdom has had a Triple-A rating since the dawn of ratings and it is the third largest economy in Europe after Germany and France. The large population of more than 62.3 million generated $2.189 trillion in projected 2010 GDP . This is a rather tricky situation when it comes to ratings. S&P has a “AAA/stable” r
ating and Moody’s has a “Aaa/stable” rating. What is interesting is that after the peak of the meltdown woes, Britain’s rating by S&P did carry a “negative” outlook before that was reverted back to a “Stable” outlook in the Triple-A rating in 2010.
Public debt was put at 76.5% of GDP. The country’s imports of natural resources has been on the rise and the financial meltdown and property crash was rather brutal for England. There are taxation issues that are ongoing, a near-nationalization of aspects in banking to keep the banks from collapsing, a coming austerity measures, and rising debt and deficit spending that is trying to reverse. The inherent risks and ongoing problems do pose a problem long-term. The good news here is that by staying out of the Euro it still owns the rights to its own printing presses and it can print money to meet its obligations.
The United States
Perhaps the trickiest of Triple-A rating analysis is right in the backyard here in the United States. The Triple-A ratings are there and the outlook is stable. For a ratings agency to downgrade the United States, the argument would be that there is no such thing as a Triple-A rating. The world’s biggest economy has a population of 310 million and GDP at about $14.72 trillion. Currently, there are no issues from S&P or Moody’s on the Triple-A with a stable outlook… But. It was in December 2010 that Moody’s noted that unless there are offsetting measures to the recent US tax agreement, the overall stimulus package will be “credit negative” for the U.S. and it noted that it increases the likelihood of a negative outlook on the US government’s “Aaa” rating during the next two years. Public debt is not as high as some nations, but having an expected 58.9% of GDP tied up as debt when we have high deficits will make this figure radically higher in the coming years.
The question is not one of today but longer term. New healthcare reform, a deep recession that led to nearly 10% official unemployment, inverted property values, massive deficit spending, massive military spending, and a need to update the infrastructure simply means that the finances are out of alignment. Cutting government spending and higher taxation hurt growth, so there is a perpetual debate that is happening at a time of massive government stimulus while we have military in-theater at the same time. Another huge risk is that the United States has a shorter debt-maturity schedule than it has historically and rising rates bring up the issue of the cost of debt servicing. One last note on the United States and its Triple-A rating. For a ratings agency to downgrade the United States, the argument will come up that no other nations are worthy of Triple-A rating either.
As a reminder, much of the data is on updated forecasts and may end up being slightly different. These GDP figures are also all converted for dollars, and currency fluctuation can distort the final figures. What is static is that some of the world’s great Triple-A ratings might not be as riskless as many investors believe.
JON C. OGG
