US, top European economies in budget dilemma: Moodys

LONDON (AFP) - The top big four economies are strongly placed to keep their top credit status but will face slightly increased risk when they curb overspending despite weak recovery, Moodys said on Monday.
The United States, Germany, France and Britain remain well positioned, Moodys credit rating agency said. Its report contrasted with some warnings in recent months that huge public deficits and debt could undermine the credit status of some leading economies.
Moodys, one of the three leading world credit agencies, said that the ratings of all AAA governments are currently well positioned despite their stretched finances.
Its remarks also covered other AAA-rated countries Spain, which is widely considered to having particularly strained public finances, and Denmark, Finland, Norway and Sweden.
But Moodys said they all faced key challenges and it warned that if they were slow to withdraw stimulus, and central banks raised interest rates, the cost of servicing their debt could pose a risk to their credit ratings.
The recovery that has taken hold across the global economy remains fragile in several of the large advanced economies, the agency said.
Most of these had applied aggressive budget and also monetary policies to support their economies through the financial crisis.
This exposed governments to substantial execution risk in the way they withdrew from the exceptional stimulus they had provided, Moodys said.
And that could yet make their credit more vulnerable, the senior vice president in Moodys sovereign risk group, Arnaud Mares, said.
But the ratio of interest payments to government revenues indicates that the ratings of all AAA governments remain well positioned, he said. The United States and Britain, which were the most stretched with regard to their ability to afford their levels of debt, benefited from a substantial ability to reverse a debt problem after a shock.
Moodys said that a key issue was whether governments were able and willing to enact unprecedented adjustments, and AAA-rated governments faced a delicate balancing act on the timing of action to correct public finances.
If they tightened up before demand from the private sector had become self supporting, there was risk that recovery, and therefore tax revenue, could be undermined.
But if action to correct public finances were postponed much longer, market patience could be tested and central banks might be forced to take the initiative, Moodys said, referring to a possible increase in official short-term interest rates.
At the current elevated levels of debt, rising interest rates could quickly compound an already complicated debt equation, with more abrupt rating consequences a possibility.
Moodys said that Spain had been the first AAA-rated country to rise to this challenge by announcing measures, but its corrective process would be drawn out and painful.
Other AAA-rated governments faced the same pressures in the next few months, Moodys said.