On America’s current path, U.S. debt is set for a historic downgrade by 2018 according to Moody’s. This disclosure is a result of the firm’s newly increased transparency whereby it now gives better guidance on where credit ratings are heading.
Moreover, should U.S. government forecasts prove too optimistic, this downgrade could come as soon as 2013.
2018 lights up as the year the U.S. could be in line for a downgrade if Congressional Budget Office projections hold.
The key data point in Moody’s view is the size of federal interest payments on the public debt as a percentage of tax revenue. For the U.S., debt service of 18%-20% of federal revenue is the outer limit of AAA-territory, Moody’s managing director Pierre Cailleteau confirmed in an e-mail.
Under the Obama budget, interest would top 18% of revenue in 2018 and 20% in 2020, CBO projects.
But under more adverse scenarios than the CBO considered, including higher interest rates, Moody’s projects that debt service could hit 22.4% of revenue by 2013.
Moody’s describes how the key metric to watch is interest payments as a % of tax revenue. A future downgrade would increase the yields required by investors from U.S. debt, thus a downgrade would likely make this key metric look worse, increasing the risk for further downgrades and so forth, in a similar fashion to what we have been watching in Europe.