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Exploding debt threatens America PDF Print E-mail
Wednesday, 27 May 2009 12:39

Financial Times - America could be the next major economy to be slapped with a debt alert after Standard & Poor's issued an unprecedented warning to Britain yesterday.

The US national debt is expected to hit critical levels even sooner than Britain's, suggesting it is also at risk of being placed on 'negative' watch by the credit rating agency. 

Standard & Poor's yesterday threatened to remove Britain's coveted AAA status for the first time since it began assessing the public finances in 1978. America has enjoyed a gold-plated rating since the 1940s.

S&P said a possible doubling of Britain's national debt to nearly 100 per cent of gross domestic product by 2013 would be 'incompatible' with its impeccable debt rating. Public debt hit £754billion last month, the equivalent of 53.2 per cent of GDP.

America went into the financial crisis in 2007 with a debt burden of 63 per cent, even higher than Britain's 44 per cent, and it could hit the 100 per cent mark even sooner than we do, analysts said.

Indeed, the logic of yesterday's move against Britain could be a series of damaging debt downgrades across advanced economies.

'They will be feeling nervous in the US,' currency strategist Chris Turner of ING said. The removal of a country's AAA rating can have far-reaching consequences, driving up the cost of borrowing and forcing investors to dump its bonds.

For example, foreign central banks could shed up to £40billion of UK gilts if we were downgraded from AAA, City estimates show.

Pension funds in Britain could also be propelled into trimming their portfolios of British gilts because of rules requiring them to hold top-rated instruments.

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