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Time's running out for USA
Thu, 3 Feb Pre-Open

Egypt is grabbing headlines everywhere. People out there are fed up of the current regime and need a change. The country is rife with riots. Quite unsurprisingly, ratings agencies Moody's has taken a dim view of things. Continued protests have led it to downgrade Egypt's ratings from stable to negative.

Egypt is not the only country that Moody's has pulled up though. US and Japan, two of the largest economies of the world have also come in for some harsh words.

Moody's is of the opinion that both these nations better come up with credible deficit spending plan. Or else, the markets will lose patience and start dumping their bonds. Moody's has gone a step further and has actually cut Japan's long term debt rating recently. It marked the first occasion since 2002 that the ratings agency has done so.

Moody's further went on to suggest that even the US risks losing its AAA rating if it doesn't do anything about its ballooning debt. It should be noted that since the financial crisis broke out, the US' outstanding public debt has swelled to more than 60% of its GDP.

However, this is not all. A huge US$ 1.5 trillion deficit is expected this year, indicating that the outstanding debt will rise further. Furthermore, if one takes into account the unfunded liabilities in the form of social security benefits and healthcare reforms, the magnitude of the debt becomes even more colossal indeed.

The only way out for US is perhaps to bridge its deficit as quickly as possible. This can be achieved not only by making its revenues grow but also through a spending cut. However, these things are easier said than done. Revenues will increase at a fast pace only if its GDP is growing. Given the high unemployment and the new found tendency of US consumers to save more, strong growth in GDP looks very difficult indeed.

Also, with so many stimulus programs underway, bringing about a cut in spending looks very difficult as well. All in all, the US debt problems show little signs of easing off in the next few years. Consequently, a debt downgrade looks a very strong possibility. It is perhaps a question of 'when' and not 'if'.

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