America's Solid Credit Rating Gets Shaken

(March 15) -- Could the federal balance sheet become so strained that the U.S. can't pay its debts?

The short answer is not now or anytime soon. But a quarterly look at the government's financial situation by Moody's Investors Service says the costs of stimulating the economy and fending off a global depression have left the U.S. and some other major Western economies with "a delicate balancing act" as they hang on to their top credit ratings.

The U.S., like fellow top-rated borrowers Britain, Germany and France, is struggling with both persistent unemployment following a recession -- making all three want to spend more on stimulus -- and diminished revenue from tax income, which is another recession symptom.

"This exposes governments to substantial execution risk in the implementation of their exit strategies, which could yet make their credit more vulnerable," said Arnaud Mares, a senior vice president at Moody's Sovereign Risk Group and author of the new report.

The loss of the nation's triple-A credit rating would add billions or trillions to the cost of borrowing money through the issue of Treasury securities, although that trouble might pale in comparison to the kind of economic cataclysm that would badly weaken confidence in American fiscal trustworthiness. Even worse than the recent financial crisis, picture a run on the dollar and a credit freeze that could keep banks from lending.

And yet the report from Moody's is only the latest warning about the oceans of red ink generated by the U.S. government's fiscal stimulus, the waging of two wars, significant tax cutting in the past decade and a political inability to find solutions for the looming financial problems of Social Security and Medicare.

This year, for the first time since Congress last made changes to Social Security in the 1980s, the program will pay out more than it collects in Social Security taxes. And as a growing share of Americans reach retirement age, that deficit -- an estimated $29 billion this year -- is expected to balloon. The Federal Reserve, members of Congress and successive presidents have warned about an impending Social Security crisis in the coming decades, but opposition by older Americans to any changes has scuttled all efforts at reform.

It doesn't help that for decades the federal government has essentially been borrowing money from the Social Security surplus by selling to the program some $2.5 trillion in bonds.

For Moody's and others, though, the more pressing political question is dealing with discretionary spending -- the budget choices made each year beyond the mandatory spending for Social Security, Medicare and similar programs. And that includes government programs aimed at getting people back to work and nurturing the economic recovery.

"In light of the muted recovery, discretionary fiscal adjustment is now the principal means of repairing the damage that the global crisis has inflicted on government balance sheets," said Pierre Cailleteau, managing director of Moody's Sovereign Risk Group. "A key issue is whether governments are able and willing to implement such unprecedented adjustments. Growth will support some governments' adjustment plans more than those of others, but no government can rely on it."

The political difficulty of cutting spending -- imagine a member of Congress voluntarily reducing dollars headed toward his or her district or state -- is the main reason President Barack Obama ordered creation of a National Commission on Fiscal Responsibility and Reform. The idea is for the commission to make hard budget choices, leaving Congress with the option of approving them as a whole or rejecting them.

But the commission's recommendations aren't due until December.

In the meantime, Congress will be making election-year use of its control over the national purse strings, which is likely to inflate the already massive deficit anticipated for the proposed budget Obama unveiled last month. The Congressional Budget Office estimates that even if Congress adds no spending to the budget proposal, the federal government will record a deficit this year of $1.5 trillion, or more than 10 percent of the gross national product.