The Economic Advisor

Will the US and UK Lose Their Triple A Debt Ratings?

Since December, 2009, the world’s leading investor services have warned that the United States and Great Britain may lose their top credit ratings unless their inchoate economic recoveries develop into sustained economic growth.

The two nations have taken similar steps to resuscitate their struggling markets since the bottoms fell out late in 2008, and both have shown a few encouraging signs in the last several months. Still, bellwether Moody’s Investor Service recently repeated its warnings: The US and the UK face downgrades if they fail to grow at rates the two governments forecast.

The unexpected warnings about the United States’ credit rating prompted fresh concern in China, the largest international holder of American sovereign debt. Approximately 60% of China’s foreign reserves-nearly $780(US) billion-are in US bonds.

Unemployment and consumer debt slow American recovery.

In the last quarter of 2009, the American economy grew at approximately 2.7%–in line with analyst’s predictions, and actually ahead of conservative forecaster’s estimates. American inflation remained well under control, and the U.S. Federal Reserve has kept interest rates at their record lows, encouraging banks to grant credit to worthy borrowers.

Just as importantly, the Obama administration has taken aggressive steps to relieve banks and local lending agencies of toxic assets, promulgating three home mortgage refinancing programs with government guarantees to lenders.

In Q4-2009, those three mortgage programs slowed but did not stall steady increases in defaults and foreclosures. Similar incentives to first-time home-buyers slowed declines in sales of new homes, but the housing industry remains burdened with excess inventory, and new-home starts continue their decline.

Economists blame continued high unemployment for sluggishness in the American recovery. The “official” unemployment rate hovers near 10%. With under-employed workers added to the count, the rate climbs to over 16%; and with “discouraged workers” factored into the equation, more than one in every five American workers cannot find gainful employment.

Looking deeper into the United States’ unemployment woes, economists blame out-sourcing for the start of seven years’ sustained job losses. A crisis in the American automotive industry exacerbated problems caused by out-sourcing, and then steady erosion of the manufacturing base further complicated the plight of American workers. Economists agree that economic growth without return to full employment augurs poorly for United States borrowing privileges with international creditors.

“The United States cannot sustain its economy simply by selling other nation’s goods; it must return to manufacturing its own products,” one expert aptly summarized.

Budget woes plague Brits.

The Fitch agency, meanwhile, cautioned investors about the future of British credit, basing its warnings on its discomfort “with the fiscal path set out by UK authorities.” Fitch officials saw no imminent threat to the UK’s triple-A rating, because Britain’s leading economic indicators remain “within tolerance” of international investors.

But they gave voice to their worries about the nation’s widening trade deficit and the threat of more bank failures. In its official statement, the Fitch agency said, “The UK…must outline more credible fiscal consolidation programs over the coming year, given the pace of fiscal deterioration and the budgetary challenges they face in stabilizing public debt.”

Two troubling trends inform Fitch’s apprehensiveness: The agency pointed out, first, so far in Q1-2010, British exports have fallen and the UK has failed to gain a greater share of the world’s market, putting a drag on the nation’s economic growth. And second, the government has failed to make inroads into the fiscal deficit as spending cuts and tax increases, of course, remain politically unpopular.

Michael is an expert in economics and debt management. Please visit his ask an expert website to ask questions about money or the economy. Continue the discussion at his site and weigh in on the debate: Will the United States credit rating drop.