As Moody's Targets Japan, The Sovereign Debt Crisis Moves Closer To The US

It is one thing when credit agencies downgrade the sovereign debt of modest-sized nations such as Greece or Spain. It is quite another when the world’s largest economies like Japan or the UK go into the crosshairs of analysts.

Moody’s (MCO) said its outlook on Japan would move into the negative category if the world’s No.2 economy by GDP does not get more control over its debt. According to The Wall Street Journal, Moody’s upped Japan’s domestic debt rating to Aa2 last May. Now, it may move the other way.

While Moody’s and its peers have spent the last several months concentrating on the debt of troubled southern European nations, they have dropped hints more frequently about the health of the financial systems in Japan, the UK and the US. Almost all of their comments have centered on debt and debt service in these larger nations. Interest paid on Treasury debt has been soaring the last two years and is expected to reach over $700 billion a year by the end of the decade.

Moody’s has also stress its belief that it will be hard for nations including the US and Japan to “grow” their way out of the debt problems. The GDPs of these nations are not expected to have average growth better than 3% over the next ten years. Recent housing information, data on a precipitous drop in bank lending, intractable unemployment, and falling consumer confidence have caused some economists to say that the possibility of a double dip recessions has risen. At the very least the most recent economic data about the US has raised the issue that growth will move a snail’s pace over the next year or two.

The debt ratings of the Japan and the largest economies of the West are not inextricably linked, but one has to assume that if Japan’s debt is downgraded it is a warning signal for the US and large European nations. Warnings from the largest credit ratings can never be taken with a lightly. The are actually storm flags put up as the gales come in.

Douglas A. McIntyre