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Is it time to be a little sanguine about all this extra debt?

Wednesday’s Budget debt figures have - apparently - given rating agency Moody’s cause to revisit its analysis of the UK’s triple-A rating.

Arnaud Mares, Moody’s lead analyst on the UK rating committee is quoted in Friday’s Telegraph:

Treasury projections that public sector net borrowing will remain above 5pc of GDP five years from now… are a cause for concern. This suggests that fiscal policy will have to be tightened much further than currently envisaged. The alternative would be that the Government chooses to live with a permanently higher debt burden which would likely have rating implications over time.

The Telegraph accordingly runs with the headline, “Borrowing puts UK’s AAA rating in danger.” But Mr Mares statement is actually quite closely couched. The government will tighten fiscal policy in years to come. And the UK’s triple-A rating won’t, therefore, necessarily be endangered.

It’s very easy to overplay the actual risk of a triple-A downgrade for a country like the UK. Perverse though it may seem, even an absolutely huge debt burden need not cause a loss of the top-notch grade.

Triple A countries can cope with debt burdens far bigger than the UK’s.

Germany’s debt-to-GDP ratio has been higher than the UK’s for years (currently just above 60 per cent) and France’s too (about 75 per cent). Both are triple-A rated. The Japanese government has had a debt-to-GDP ratio above 100 per cent for more than a decade. It’s currently at around 180 per cent.  Moody’s still has a triple A long-term issuer rating on Japan.
Here’s a helpful, perspective-giving graph produced by Japan’s ministry of finance:

Also particularly instructive - and more up to date - is Moody’s analysis, published earlier this week, “How safe are safe havens?”, in which the agency analyses the impact of the latest slew of expansionist fiscal measures on triple-A rated sovereigns.Moody’s new Special Comment addresses the legitimate concerns among investors as to whether this unusual “policy activism” is increasing the likelihood and precocity of a durable economic rebound — on which several sovereign Aaa ratings are predicated — or whether, conversely, policymakers are in fact taking imprudent risks with public finances, thereby weakening sovereign creditworthiness.And as Pierre Cailleteau, Team MD of Moody’s sovereign risk group, and Mares’ boss, says, safe havens’ triple-A status, “depends on two potentially unstable notions: continued public trust in government institutions, including the currency, and sustained inter-generational solidarity mechanisms.”It is the latter of these that gives the US, Germany, Japan and the UK such huge room for manoeuvre. Sovereign credit risks are predicated on a whole series of qualitative as well as quantitative judgements about the strength, age, and “institutionalisation” of a country’s financial practices. That we have an age-old central banking system, a set of (mostly) sound checks and balances and a very secure financial infrastructure means that, in the top rating agencies’ views, the UK, like Germany or Japan, is well positioned relative to more politically and economically fragile peers.As Moody’s says in its overview of sovereign ratings:The probability of default for a government depends on both the ability and willingness to pay.

Countries with long-term, firm financial systems that lock them firmly into the global economy are, of course, much more “willing” to pay than those without them.

Or to flip all this seeming optimism around: the UK won’t lose it’s triple-A rating because Moody’s knows the government would rather cut public spending to the bone first.

Related links:
Sovereign defaults, from 1500 to the present day - Long Room