Fitch Ratings-London/New York-10 September 2008: Fitch Ratings said today that fiscal risks faced by the US government have risen following the recent rescue package for the two government-sponsored enterprises (GSEs), Fannie Mae and Freddie Mac, but these remain within the tolerances of the US’s ‘AAA’ sovereign rating. Fitch affirmed the US federal government’s Long-term Issuer Default ‘AAA’ rating with a Stable Outlook on 7 September 2008.
The measures announced by the Treasury on 7 September 2008 effectively shift these two GSEs into the public sector. Their combined gross debt liabilities were equal to USD1,635bn at end-June 2008 or 11.4% of GDP, with additional guarantees of USD3,483bn (in gross terms) or 24.3% of GDP. Fitch does not include the debts of the broader public sector including public financial corporations such as the two GSEs in its own internationally comparative measure of general government gross debt. This is because such entities have large gross financial assets as well as liabilities. However, the contingent risks to the government from potential losses at the two GSEs - which was already factored into Fitch’s assessment of the government’s creditworthiness - has risen as the health of Fannie Mae and Freddie Mac has deteriorated, prompting the Treasury to announce explicit financial support. The scale of potential future losses at the two GSEs is uncertain but Fitch notes that the Treasury has committed to injecting up to USD200bn for this purpose if necessary, equivalent to 1.4% of GDP.
General government gross debt (which includes federal, state and local government debt but excludes public sector financial companies and guarantees) was equivalent to 57.1% of GDP at end-2007. With the fiscal deficit expected to widen sharply this year as a result of the economic slowdown and the fiscal stimulus package, Fitch expects general government debt to rise to 59.5% of GDP at end-2008 even before any capital injections to the two GSEs. Overall Fitch now judges the US government’s balance sheet strengths to be broadly on a par with those of other large ‘AAA’-rated sovereigns with relatively high public debt levels, such as France and Germany where general government debt is projected to be 64.3% and 63.5%, respectively, at-end 2008.
The US’s ‘AAA’ rating is supported by its large, high income, and flexible economy and the government’s unfettered access to market financing, both at home and abroad. The dollar’s unthreatened status as a global reserve currency mitigates concerns about the rise in the economy’s net external debt in recent years associated with sustained current account deficits. Fitch notes that a characteristic of ‘AAA’ sovereigns, in addition to a high level of debt tolerance, is their capacity and willingness to enact policy responses appropriate to maintain the health of both the economy and the public finances over the medium- to longer-term.
Write out the last paragraph to be the opposite of what it says.
it’s currency risk that I’d worry about. As they’re borrowing in dollars, a weak dollar policy at some point might prove too tempting. Wouldn’t be surprised if investors will want the US to borrow in euros. In this regard, the debt is AAA as it’ll get repaid, it just mightn’t buy you as many euros.