Table of Contents:
Analyst Contacts:
London 44.20.7772.5454
Pierre CailleteauArnaud Marès
Frankfurt 49.69.7073.0700
Dietmar HornungAlexander Kockerbeck
New York 1.212.553.1653
Steven Hess
Analytical Coordinator for this issue
December 2009
Now that the worst of the financial and economic crisis appears to be behind us,there are three major challenges facing the eight Aaa-rated sovereigns – France,Germany, UK, US, Austria, Luxembourg, New Zealand and Switzerland – that arediscussed in this second issue of
Moody’s
Aaa Sovereign Monitor
.1. Some countries will struggle to deal with the very large fiscal imbalances andaccumulated debtthat have resulted from the global crisis.2. The sustainability of the recovery that now seems to have begun is open toquestion. Economic growth will be an important factor in supporting (or not)fiscal consolidation.3. The currently abnormally low interest rates are unlikely to last, and will bereplaced by higher interest rates that will affect the affordability of the muchlarger debt burdens that some Aaa governments now carry.In 2010, Aaa governments with stretched government balance sheets will be underpressure to announce credible fiscal plans and – if financial markets start losingpatience – to start implementing them. This will complicate the recovery and testpolitical cohesion.This report analyzes these challenges for the four largest Aaa governments andselected others with the help of detailed charts for each country. In addition, aspecial section at the end of this report discusses the concept of debt“financeability” – a key characteristic that all Aaa governments are endowed with – and the varying degrees to which Aaa governments are able to issue debt tomeet their financing needs.
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Global Economic Recovery, but Fiscal Crisis Remains
The global economy has stabilized and is recovering from the recession. Eastern Asia (including Aaa-ratedSingapore) is recording the most rapid recovery. Three of the four largest Aaa-rated countries that are coveredin this Monitor also recorded positive growth in Q3. Indeed, the US and the Eurozone as a whole reportedincreases in real GDP, although the Eurozone’s rate of increase was not impressive. However, the UKeconomy continued to decline. Figures are not yet available for all other countries, but it appears very likelythat Australia’s growth was sustained, and Canada eked out a small positive increase during the quarter.Nevertheless, questions remain about the durability of the recovery. The effects of the financial crisis andglobal downturn on the fiscal and debt positions of Aaa governments are still unfolding and likely to be long-lasting. Moody’s considers government financial strength – i.e. the future trajectory of the government’s debtand its affordability – to be the primary and currently most crucial rating consideration for Aaa-ratedsovereigns. We believe that the other rating factors – economic and institutional strength as well assusceptibility to event risk – continue to be supportive of the Aaa ratings of the 17 countries in this category.Over the next year or two, the extent of the sustainability and strength of the recovery will become apparent.The questions we will be seeking to address are as follows:
How much of the recent return to growth was due to the stimulus spending by governments and theirexpansive monetary policies?
If the stimulus is removed, will growth be sustainable?
Has the crisis lowered the growth trend of some Aaa economies for an extended period?The answers to these questions, in addition to actual fiscal policies, will be important in determining how andwhether governments can achieve fiscal consolidation or reverse their debt trajectories.So, while the macroeconomic and financial-system crises may be close to an end, the fiscal crisis in a numberof Aaa-rated countries continues and will last for several years. In 2009, Moody’s has downgraded only one
Debt trajectories 2009-2013 - Baseline scenarios
024681012020406080100
Debt to GDP (%)
I n t e r e s t p a y m e n t s t o G G r e v e n u e ( % )
USA (GG)LuxembourgNew ZealandSwitzerlandFranceUKAustriaGermany120
Aaa Space
Debt Reversibility Band
Countries covered by the Dec. 09 Aaa Sovereign Monitor
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Aaa government: Ireland. The lack of rating actions on other Aaa countries indicates that, while most of thesecountries have “lost altitude” within the Aaa space, they retain the characteristics necessary for a Aaa rating.These characteristics include, among others, a high degree of “debt financeability,” “debt affordability,” and“debt reversibility”. Moody’s approach to measuring debt financeability – i.e. the ability to raise debt without itsubstantially affecting the cost of the debt – is the subject of a special section (page 21).Debt affordability – which is best represented by the ratio of interest payments to government revenue – is oneof the biggest uncertainties going forward. In the graphs on individual Aaa countries shown over the followingpages, we have illustrated a range of possible outcomes for this ratio. Under some scenarios, this ratio couldreach problematic levels in the next few years in some countries. However, under the baseline scenario, westill believe that the trajectory of the debt metrics, while unfavourable in the near term, does not currentlythreaten the ratings.The countries covered in this issue include the largest four Aaas – France, Germany, the United Kingdom andthe United States – which will feature in every issue of this quarterly publication. In addition, we have shortersections on four other Aaa countries: Austria, Luxembourg, Switzerland and New Zealand.Overall, the European countries are characterized by potential contingent liabilities from their banking systems.Indeed, Luxembourg and Switzerland have very large banking systems in relation to their economic size.Moreover, the exposure of Austrian banks to Eastern Europe caused some concern at the height of the crisisand may not have fully materialized yet. In the southern hemisphere, meanwhile, New Zealand’s banks aremainly owned by strong foreign banks, but the size of the country’s (and the banks’) external liabilities havealso raised questions, now considerably alleviated, about the government’s contingent liability. It is worthnoting that Moody’s maintains negative outlooks on the banking systems of Austria, Luxembourg, and NewZealand, reflecting uncertainty over possible losses and, therefore, the size of the contingent liability. This isalso the case with many other countries globally, although Switzerland’s system still has a stable outlook.
What To Find in This Report
This quarterly report sheds light on and puts into practice the conceptual framework Moody’s uses in analyzingdebt metrics in order to identify rating pressures on Aaa-rated governments. The report also contains anumber of updated data and analytical tools to dimension debt trends under different scenarios.
Section 1
presents our analytical framework and identifies the Aaa-Aa demarcation zone.
Section 2
briefly recapitulates our three scenarios, which differ in their assumptions in terms of economic andfinancial recovery.
Section 3
recapitulates a way of categorizing Aaa countries as Resistant, Resilient, or Vulnerable
Section 4
focuses on the four largest Aaa countries (Germany, France, the UK and the US)
Section 5
briefly introduces recent and forthcoming developments in four other Aaa-rated sovereigns (Austria,Luxembourg, New Zealand and Switzerland).
Section 6
(Special Focus) describes how we understand and measure the concept of debt financeability.
Appendix
presents our debt projections in greater detail for the countries that are the focus of this secondissue of the Aaa Sovereign Monitor.
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