Moody's Fears Social Unrest as AAA States Implement Austerity Plans

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The world’s
five biggest AAA-rated states are all at risk of soaring debt costs
and will have to implement austerity plans that threaten "social
cohnesion", according to a report on sovereign debt by Moody’s.

The US rating
agency said the US, the UK, Germany, France, and Spain are walking
a tightrope as they try to bring public finances under control without
nipping recovery in the bud. It warned of "substantial execution
risk" in withdrawal of stimulus.

"Growth
alone will not resolve an increasingly complicated debt equation.
Preserving debt affordability at levels consistent with AAA ratings
will invariably require fiscal adjustments of a magnitude that,
in some cases, will test social cohesion," said Pierre Cailleteau,
the chief author.

"We are
not talking about revolution, but the severity of the crisis will
force governments to make painful choices that expose weaknesses
in society," he said.

If countries
tighten too soon, they risk stifling recovery and making matters
worse by eroding tax revenues: yet waiting too is "no less
risky" as it would test market patience. "At the current
elevated debt levels, a rise in the government’s cost of funding
can very quickly render debt much less affordable."

Moody’s said
Britain has been slower than Spain to "rise to the challenge"
and may be at greater risk of smashing through buffers of AAA creditiblity
if rates suddenly rise. Spain made errors at the outset of the crisis
but has since become a model pupil, pledging to cut the budget deficit
from 11.4pc of GDP to 3pc by 2013.

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the rest of the article

March
17, 2010

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