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http://www.investors.com/NewsAndAnalysis/Article.aspx?id=532490

In the wake of the financial crisis and recession, Moody's Investors Service has brought new transparency to its sovereign ratings analysis — so much so that 2018 lights up as the year the U.S. could be in line for a downgrade if Congressional Budget Office projections hold.
The key data point in Moody's view is the size of federal interest payments on the public debt as a percentage of tax revenue. For the U.S., debt service of 18%-20% of federal revenue is the outer limit of AAA-territory, Moody's managing director Pierre Cailleteau confirmed in an e-mail.
Under the Obama budget, interest would top 18% of revenue in 2018 and 20% in 2020, CBO projects.
But under more adverse scenarios than the CBO considered, including higher interest rates, Moody's projects that debt service could hit 22.4% of revenue by 2013.
Because debt levels and interest rates can't be lowered overnight, the obvious way of staying within the AAA limits set by Moody's would be to raise revenue.
"It would bias the remedy in favor of tax increases for countries that want to improve their bond rating," said Brian Riedl, budget analyst at the conservative Heritage Foundation.
Because economic growth is a key to fiscal health, Riedl argues that a ratings agency concerned about whether bondholders are repaid should bias spending cuts over tax increases.
Brian Bethune, chief U.S. financial economist at IHS Global Insight, says "the occasional missives about this problem (from ratings agencies) could put some pressure on rates" in advance of any ratings change.
Bethune is among economists who see CBO projections as "wishful thinking."
The budget scorekeeper's outlook assumes discretionary spending restraint, broad-based tax hikes and well-behaved interest rates.
Nevertheless, it sees debt reaching 90% of GDP in 2020, up from 53% at the end of 2009.
In the new Milken Institute Review, Len Burman, former director of the Tax Policy Center and now a professor at Syracuse University, calls CBO projections "wildly optimistic."
"They presuppose that interest rates on government securities will remain historically low, and that the economy will grow at a historically healthy clip," Burman wrote.
atriot:

In the wake of the financial crisis and recession, Moody's Investors Service has brought new transparency to its sovereign ratings analysis — so much so that 2018 lights up as the year the U.S. could be in line for a downgrade if Congressional Budget Office projections hold.
The key data point in Moody's view is the size of federal interest payments on the public debt as a percentage of tax revenue. For the U.S., debt service of 18%-20% of federal revenue is the outer limit of AAA-territory, Moody's managing director Pierre Cailleteau confirmed in an e-mail.
Under the Obama budget, interest would top 18% of revenue in 2018 and 20% in 2020, CBO projects.
But under more adverse scenarios than the CBO considered, including higher interest rates, Moody's projects that debt service could hit 22.4% of revenue by 2013.
Because debt levels and interest rates can't be lowered overnight, the obvious way of staying within the AAA limits set by Moody's would be to raise revenue.
"It would bias the remedy in favor of tax increases for countries that want to improve their bond rating," said Brian Riedl, budget analyst at the conservative Heritage Foundation.
Because economic growth is a key to fiscal health, Riedl argues that a ratings agency concerned about whether bondholders are repaid should bias spending cuts over tax increases.
Brian Bethune, chief U.S. financial economist at IHS Global Insight, says "the occasional missives about this problem (from ratings agencies) could put some pressure on rates" in advance of any ratings change.
Bethune is among economists who see CBO projections as "wishful thinking."
The budget scorekeeper's outlook assumes discretionary spending restraint, broad-based tax hikes and well-behaved interest rates.
Nevertheless, it sees debt reaching 90% of GDP in 2020, up from 53% at the end of 2009.
In the new Milken Institute Review, Len Burman, former director of the Tax Policy Center and now a professor at Syracuse University, calls CBO projections "wildly optimistic."
"They presuppose that interest rates on government securities will remain historically low, and that the economy will grow at a historically healthy clip," Burman wrote.
