Moody's is warning the U.S., France, Germany and the United Kingdom that they need to better control the rising costs of pensions and healthcare subsidies.
Moody's Investors Service reiterated its stance that it could downgrade its outlook of U.S. debt, the first step toward downgrading the debt from Moody's highest rating of Aaa, which the United States has held since 1917. But the rating agency's top analyst for U.S. debt emphasized Thursday that no downgrade in the debt is looming.
Standard & Poor's Ratings Services has also raised concerns about U.S. debt. The Wall Street Journal reported that Carol Sirou, head of S&P France, told a conference in Paris Thursday that a jobless recovery in the United States could threaten the U.S. economy and its debt rating. "No triple-A rating is forever," she said, according to the paper.
Moody's outlook would only be dropped if Washington takes no action at all to trim spending or raise taxes over the long term, said Steven Hess, Moody's lead analyst for the United States debt rating.
"We said the probability we would do it over the next couple of years is increasing. without measures to reduce the deficit and debt trajectory," Hess said Thursday.
Moody's first said it was considering an outlook downgrade in December, after President Obama signed a tax cut and economic stimulus bill. Hess said in a report then that the bill would add more debt than it would generate revenue, unless other measures were taken to offset the effects.
Moody's noted Thursday that the U.S. and Britain have had the steepest increases in government debt. The U.S. launched a $600 billion Treasury-bond buying program recently in an effort to stimulate the economy. Moody's said, however, that all four countries still have balance sheets that are compatible with their triple-A ratings, despite pricey government programs meant to prevent a return to recession.
Looking at the longer term, Moody's said the countries face "dramatic increases" arising from aging-related pension and health care subsidies. "These future costs must be brought under control if these countries are to maintain long-term stability in their debt burden credit metrics," the Moody's report said.
Sirou's comments in Paris were not based on any new information, and simply built on previous Standard & Poor's reports, said spokesman David Wargin.
An S&P report in 2009 said "fiscal risk has noticeably increased," for the United States as it has taken on more debt to stimulate the economy. But Standard and Poor's maintained its AAA rating on U.S. debt with a "stable" outlook because other factors outweigh the risks, the report said.
While U.S. debt is high, the Treasury has a special advantage in paying off loans because the dollar remains the world's global reserve currency, Hess said. That means the United States is in the unique position of being able to print its own dollars to pay off its debt. The chances of the U.S. dollar being replaced by another currency as the global reserve remain slim, Hess said. The troubled Euro is no easy substitute, and China's bond market and infrastructure is so small it couldn't quickly compete with U.S. Treasury's big debt auctions.
"The bottom line for that is that we still don't think there is a very big risk for that. The reason we think that is that there is really no alternative" currency, Hess said.
Thursday's report on the debt is part of Moody's "Aaa Sovereign Monitor," a regular report that focuses on potential outcomes of fiscal policies over the next four years.
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