The United States' and Britain's triple-A sovereign debt ratings are safe for now but both countries will need to severely adjust fiscal policies in the wake of the global financial crisis, Moody's Investors Service said in a statement released late on Tuesday.
The credit rating agency continues to divide its triple-A governments into three categories: the resistant, the resilient and the vulnerable.
Moody's said in the new quarterly report about debt levels in the world's major economies. The U.S. and Britain are both viewed as resilient: the second strongest of the three subdivisions.
Among global triple-A rated sovereigns further downgrades are unlikely over the near term, Moody's said in a statement.
Moody's believes that the U.K. and U.S., the two countries that have lost altitude in the Aaa space, continue to warrant the resilient characterization. However, to retain their resilient status, the UK and US will need to severely adjust their fiscal policies, even in the unlikely event of a vigorous rebound in their economies, the statement said.
In the United States specifically, once there is a consensus on the need to address fiscal imbalances -- the country continues to have an exceptional relative ability to grow out of its debt and its capacity to cut spending and/or raise taxes also remains significant, said Pierre Cailleteau, Managing Director of Moody's Sovereign Risk Group, who was quoted in the statement.
The pound initially gained against the dollar after Moody's comments.
A new quarterly report, on which the statement was based, said that some of the strongest resistant triple-A countries, such as Germany or France, have been more affected by the economic downturn than Moody's expected.
But the rating agency said it sees little reason to change its categorization of these countries at this stage.
Britain's triple-A sovereign debt rating remains resilient and Spain's, though vulnerable, is also safe for now, Moody's said.
Moody's does not expect rating downgrades in the near future, especially after the recent downgrade of Ireland which had been the most 'vulnerable' Aaa, Cailleteau said.
The rating agency said its central scenario was for Britain to retain its Aaa status, an unchanged view. Moody's reaffirmed Britain's Aaa rating in April and said at the time that the outlook for the rating was stable.
We assume that the adjustment to the UK's public finances that is likely to take place in the context of the forthcoming elections -- probably through cuts in spending -- will keep the debt trajectory within Aaa boundaries, the report said.
Britain faces elections next year with both major parties expected to cut public spending to rein in a spiraling budget deficit should they win.
Spain, the other 'vulnerable' Aaa, for now retains a safe distance from the Aaa-Aa demarcation line, mainly because potential growth is not likely to be as low as anticipated and also because the government's balance sheet was comparatively solid at the beginning of the crisis, Cailleteau said.
Although highly unlikely, it is conceivable that a large and wealthy economy could lose its Aaa rating if it were to experience a material and irreversible deterioration in its debt conditions over the next five years or so, following the fate of Japan in the 1990s, Cailleteau said.
Japan lost its triple-A status with Moody's downgrade in November 1998.
(Reporting by John Parry and Fiona Shaikh; Editing by Theodore d'Afflisio)