If all the fiscal commitments announced to date materialise are full by the end of 2009 the general (i.e. federal plus state, regional and local) government fiscal deficit would rise to 10% of GDP in 2009 and general government gross debt would exceed 70% of GDP for the first time since the 1950s.
"The US will likely overtake France and Germany to become the most indebted 'AAA' rated sovereign next year," says Brian Coulton, Managing Director in Fitch's Sovereigns rating group. "Nevertheless there is sufficient headroom within the tolerances of the U.S. 'AAA' rating to absorb a sizeable near term fiscal deterioration arising from measures to stabilise the financial system and prevent an excessively deep and prolonged recession."
Focussing purely on the gross debt ratio, U.S. general government indebtedness would remain consistent with 'AAA' standards and only marginally higher than France and Germany both rated AAA with Stable Outlooks. In terms of net debt, especially relevant given that the additional expenditure and debt is financing the acquisition of assets, albeit of uncertain value, the government's balance sheet looks firmly in line with 'AAA' norms.
Moreover, 'AAA' sovereign ratings are not driven by government balance sheet metrics alone. A defining feature of the highest rated sovereigns is a high level of debt tolerance. Debt tolerance reflects many intangible factors but broad macroeconomic stability over the long term and concomitant stability in government revenue is key. The U.S. exhibits these characteristics and benefits from a particularly flexible economy that should help facilitate medium term recovery from the current downturn. The lack of 'original sin' (sovereign borrowing in foreign currency) is another defining feature of 'AAA' ratings and in the case of the U.S., the dollar's role as the dominant global reserve currency reinforces the benefits in terms of financing flexibility.
But this does not mean that the U.S. government is free of any budget constraints as far as sovereign creditworthiness is concerned. 'AAA' rated sovereigns can typically be relied upon to enact policy responses to avoid a sustained deterioration in the health of the public finances. Fitch calculates that a relatively modest 2% to 3% of GDP fiscal tightening would be necessary over the medium term - most likely from the start of the next decade - to stabilise the government debt to GDP ratio at 70%. However, the US' fiscal room for manoeuvre is clearly diminished as is its ability to absorb further 'shocks.' This underscores the importance of appropriate and timely policy actions, not only in response to the current financial crisis, but also to cement the sustainability of public finances over the medium-term.
