Announcement: Moody's Comments on Aaa-Rated Sovereigns As Fiscal Adjustments Are Accelerated

France, Germany, UK and US face fiscal challenges but retain stable outlook
New York, August 17, 2010 -- The Aaa ratings of France, Germany, the UK and the US continue to be well positioned based on a forward-looking assessment of their debt dynamics and debt affordability, says Moody's Investors Service in its quarterly "Aaa Sovereign Monitor" report.

However, the rating agency says that the challenges linked to fiscal adjustments imply that the overall "distance-to-downgrade" has been further reduced for each of these four countries. Spain is a case apart, as reflected by Moody's decision to place its Aaa rating on review for possible downgrade on 30 June.

"Since the last issue of Moody's Aaa Sovereign Monitor, the debate on the optimal timing of fiscal tightening has effectively been brought to a close for the largest European Aaa-rated governments, as they are now all pursuing deficit reduction measures," says Alexander Kockerbeck, Vice President and Senior Credit Officer in Moody's Sovereign Risk Group. "In the US, a strategy for debt stabilization is still in the early stages of being developed."

Moody's believes that large Aaa governments are faced with a slightly different set of challenges from those they faced only a few months ago.

- The first challenge is to revive growth (and the associated tax revenues) at a time when macro-fiscal tools -- i.e. fiscal stimuli -- are effectively no longer available. The emphasis is therefore likely to shift towards micro-economic policy tools, aiming, for instance, at expanding labour supply and hence output.

- The second challenge is to regain or preserve access to affordable funding through credible medium-term fiscal adjustment programmes. In a context of brittle market confidence, this is a necessary, albeit not sufficient, prerequisite for large Aaa governments, particularly in Europe, to maintain control over debt dynamics.

- Lastly, a further consequence of the crisis is the reduced time available for governments to confront medium- and long-term fiscal challenges, particularly those resulting from the ageing of their populations. As discussed in a Special Focus section in Moody's new report, such reforms are critical to the ability of fiscally challenged Aaa governments to maintain their credit ratings.

This issue of Moody's Aaa Sovereign Monitor report analyzes the challenges facing the Aaa ratings of France, Germany, the UK, the US and Spain with the help of detailed charts that illustrate the "distance-to-downgrade", fiscal adjustment sensitivity, interest rate sensitivity and nominal growth sensitivity.

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Frankfurt am Main
Alexander Kockerbeck
VP - Senior Credit Officer
Sovereign Risk Group
Moody's Deutschland GmbH
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

New York
Bart Oosterveld
MD-CCO Pub, Proj and Infra Fin
Sovereign Risk Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

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