Moody’s Bright Future For US Credit

On the same day that a major US city, Detroit, filed for bankruptcy protection with debts of at least $15 billion (and potentially as high as $20 billion), credit ratings agency Moody’s chose to revise its credit outlook for the nation upwards. Detroit’s level of debt is broadly comparable with the national debt of Cyprus to put things in perspective.

Detroit, famously known as the motor city, has been hit hard by the decline in US manufacturing over the years, shrinking from a population high of 2 million in the 1950s to about 713000 today. It is blighted with the worst violent crime rate of any major US city (15245 incidents recorded in 2011); nearly 80000 blighted or abandoned buildings; only a third of its ambulances are in operation; and only half of residents paid their property taxes in 2011. America remains the richest planet in the world with the world’s largest economy.

Detroit’s problems notwithstanding, Moody’s have decided to upgrade the status of the US credit outlook from negative to stable and have reaffirmed their assessment of the nation’s credit status as AAA – the best there is. Moody’s have explained their move by explaining it was based on a declining budget deficit (this is not the same thing as the national debt, of course) which they expect to continue over the next few years. They also point to the fact that the US economy is growing faster than other leading economies with AAA ratings and shows “a degree of resilience” to the significant reductions in government spending (for example, those mandated under the Sequester).

The US budget deficit has shrunk from 7% of GDP in 2012 to an estimated figure of 4% this year, according the Congressional Budget Office. This reduction in the deficit was larger than Moody’s had predicted when setting its previous “negative outlook” statement back in 2011. Moody’s also stated that growth forecasts for the US economy for the next few years were now back in line with historic averages from before the Global Financial Crisis, noting: "These forecasts of accelerating growth are supported by a lower magnitude of fiscal tightening, continued strengthening of consumption and investment, and somewhat better international economic conditions".
Of the three major credit ratings agencies, only Standard and Poor’s has the US rating below AAA at AA+.