The U.S., the U.K., France and Germany must control spending on pensions and healthcare to keep their debt burdens stable over the long term, Moody’s Investors Service said.
“All four countries face dramatic increases under their existing policy commitments arising from aging-related pension and healthcare subsidies,” the ratings company said today in an e-mailed report from New York. “Future costs must be brought under control if these countries are to maintain long-term stability in their debt-burden credit metrics.”
The four nations are the biggest in the world to enjoy Moody’s top AAA grade. As public finances tighten, “countries have lost some time, so the pressure is somewhat higher for them to adjust as soon as possible,” Moody’s sovereign-debt analyst Alexander Kockerbeck said by telephone.
U.S. President Barack Obama on Dec. 17 signed into law an $858 billion bill extending for two years Bush-era tax cuts for all income levels. The measure also continues expanded jobless-insurance benefits to the long-term unemployed for 13 months and pares payroll taxes for workers by 2 percentage points in 2011.
“With respect to shorter-term considerations, the U.S. has taken a different approach than the other three in its response to the economic and fiscal problems,” Moody’s wrote in its Aaa Sovereign Monitor report. “The U.K.’s coalition government has introduced a strong program of deficit reduction to address the steep increases in government debt as a result of the financial crisis.”
The U.K. has pushed through the biggest spending cuts in 60 years since David Cameron’s government came to power last May. Business Minister Ed Davey said in a statement today that Britain will put an end to compulsory retirement at age 65, dismissing concern the plan may keep young people out of work and make it harder for companies to fire unproductive staff.
European Union leaders agreed in December to amend the bloc’s treaties to create a permanent debt-crisis mechanism in 2013 in an effort to stem contagion that began after Greece’s near-default last year. Europe’s most-indebted countries have started to force through austerity programs to convince investors they can get their budgets under control.
“France and Germany recorded significant debt increases, but have on balance moved toward deficit reduction, France less aggressively so than Germany,” Moody’s said.
France’s standing as one of the world’s safest debt issuers was affirmed by Moody’s competitor Standard & Poor’s on Dec. 23, reflecting confidence that the euro-area’s second-largest economy will rein in its budget deficit. S&P said France deserves its AAA sovereign credit rating because of the “wealth and depth” of its economy and the view that President Nicolas Sarkozy’s government will consolidate its budget gap.
The U.S., the U.K., France and Germany “still possess debt metrics, including the debt affordability” to keep their AAA ratings, Moody’s said in the report.
“The important message is that in spite of the policy divide between the U.S. and other AAA-rated sovereigns on fiscal austerity and the promotion of growth, the debt metrics are compatible with AAA ratings,” Sarah Carlson, vice president-senior analyst in Moody’s sovereign-risk group, said by phone.
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