Moody's Downgraded Debt Of Greece, Faith In Sovereign Debt Downgraded, Too

Moody’s (NYSE:MCO) downgraded the government debt of Greece from A1 to A2. Very few economists or bankers will be surprised. Greece is dealing with a shrinking economy and growing national debt and budget deficits. It problems are no different than most other nations, including the US. The economies of more economically sound countries are not being affected by concerns of credit agencies, at least not yet.

The Greece debt problem is a canary in a coal mine for countries such as the UK, where pubic debt is growing at an alarming rate. A powerful recovery in the global economy may save the British government from a dwindling faith in its ability to cover its debt service. A surge in GDP growth should increase employment and lift the nation’s tax base. The same assumptions hold true for the US economy although debt as a portion of GDP is America in not nearly as high as it is in the UK.

Almost every economic forecast in nations with growing debt is based on signficant improvements in both consumer spending and business revenue. That will allow government to tax their way out of deficits and decrease their national debt loads. The Congressional Budget Office forecasts for the next decade are based on based on these assumptions. The national debt continues to grow for years, even with an improvement in receipts to the IRS.

Bankers will be worried about sovereign debt downgrades and defaults in 2010 and 2011. A second recession or slowing in the rate of the recovery will put some bank balance sheets at risk. And, countries like Greece are going to find it extremely difficult to raise money at all, which simply adds to the problems of moving themselves out of harm’s way.

Douglas A. McIntyre