Michael Lombardi | When it comes to the U.S. economy, who will come to its rescue?
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Michael Lombardi | When it comes to the U.S. economy, who will come to its rescue?
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I was responsible for Moody’s sovereign ratings for over a decade, so I think I can respond to Mr Lombardi with a degree of competence. There are two main issues in evaluating a sovereign credit (1) its medium-term debt trajectory; and (2) its debt-capacity. Some countries have very little debt capacity because they lack a deep domestic capital market and can’t borrow foreign currency in the global capital markets because of their lack of market credibility. That’s most of Africa and Latin America. At the other end of the spectrum, some countries have huge debt-capacity because they have both a deep domestic capital market and access to the global capital market. Japan is the extreme example of this; Italy was an example of it until it adopted the euro and lost the captive lire market. Italy’s debt capacity declined because of the euro (ditto for the rest of the PIIGS). No one knows what America’s debt capacity is, and since market access is a function of perception, it can change at any time (although in the case of japan, it only seems to get bigger). Given that as America’s debt ratios have worsened, its cost of debt has been declining, it is clear that America’s debt capacity still has considerable room to run. The risk is that something unexpected will occur which will change the market’s perception, leading to a run on Treasuries and/or the dollar. The longer the US tolerates annual trillion dollar deficits, the closer that day comes. Personally, although the US credit has deteriorated, I still see the US as AAA in an ordinal sense. There is no better credit in the world.