Moody's: "Potential Downgrade of U.S. Debt Not Inconceivable"

Moody’s suggested that even the United States and the U.K. are not safe from seeing their coveted triple-A credit ratings tarnished down the road.

In a report titled, “AAA Sovereign Monitor,” which Moody’s will now update quarterly, the rating agency said that the U.S. and U.K must show that they can reduce their ballooning deficits in order to avoid threats to their triple-A credit ratings.

In this quarter’s report, both the United States and the United Kingdom were singled out from the rest of the 17 nations that currently enjoy a triple-A rating on their sovereign debt. The report used the term “resilient” when describing the U.S. and U.K. while the word “resistant” was applied to rest of the triple-A club.

The Wall Street Journal reports that under the most pessimistic scenario Moody's devised, the U.S. could possibly lose its coveted triple-A rating in 2013… IF the following scenario were to unfold:

"Economic growth proves anemic, interest rates rise, and the government fails to reduce the deficit and/or recover most of its assistance to the financial sector."

The chief international economist at Moody’s points out that unlike several years ago, “now the question of a potential downgrade of the U.S. is not inconceivable.”

In the U.S., a "credible fiscal consolidation strategy" is said to be required in order to prevent the debt load and associated interest costs from tipping into the ratings agency's most pessimistic scenario, the report said.

Moody’s says that the most likely path for both the U.S. and the U.K. involves modest economic growth and a program of deficit reduction. The report also makes it clear that neither country is at risk of losing their credit rating in the near term.

The report notes that "the trajectory of the debt metrics, while unfavorable in the near term, does not currently threaten the ratings" of countries like the U.S. and the U.K."