NCPA - National Center for Policy Analysis

U.S. Bond Rating Tough to Defend

February 3, 2011

Last week, Standard & Poor's lowered Japan's bond rating to AA-, the fourth-highest level.  By that standard, the United States got away with a slap on the wrist from Moody's Investors Service, which warned merely that "the probability of assigning a negative outlook in the coming two years is rising."  If you look at the U.S. budget trajectory with an eye on the lessons from Japan's recent history, there's a strong case that the U.S. rating should be cut immediately, says Kevin Hassett, director of economic policy studies at the American Enterprise Institute.

  • It's true that the United States, with total government debt equal to 98.5 percent of gross domestic product (GDP) has many years of unrestrained deficits ahead before it reaches the crisis point of Japan, which has debt of 204 percent of GDP.
  • A better number to watch, however, is 135.4 percent of GDP -- that was Japan's debt in 2000, just before S&P first downgraded it from AAA in February 2001.

If the United States makes no fiscal progress, and continues to run annual deficits at the 2011 level of $1.48 trillion dollars, it will take just six years to reach a debt level of 135.3 percent of GDP.  The Japan precedent suggests the U.S. would lose its sacrosanct AAA rating at that point, if not sooner, says Hassett. 

Source: Kevin Hassett, "AAA Rating Is Tough to Defend as U.S. Debt Soars," BusinessWeek, January 30, 2011.


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