WASHINGTON/NEW YORK If the United States were any other country, its coveted top-tier credit rating might have been stripped away by now.
The government's $787 billion economic stimulus package and $700 billion bank bailout fund have strained public resources, the recession is taking a chunk out of tax income, and the first big wave of Baby Boomers will soon become eligible to start collecting retirement benefits.
Yet the threat of a U.S. debt default -- something that could plunge global markets back into chaos -- remains virtually nil.
The United States issues bonds in its own currency and can always print more dollars -- albeit at the cost of higher inflation -- should it ever run into trouble making payments.
That means unlike Japan, which lost its last remaining AAA rating when Moody's downgraded it on Monday, a U.S. downgrade is an extremely remote possibility, even if it does not mean the world's biggest economy is on a sustainable fiscal path.
"The chance of a U.S. Treasury default is zero, so from that standpoint, talk of the U.S. losing its AAA is being overplayed," said Peter Hooper, chief economist at Deutsche Bank in New York.
"Yes, there are risks, certainly interest rate and inflation risks, around what is happening, but default risk is very, very low," he added.
A credit rating is a measure of how likely it is that a debt issuer will default, and a downgrade of a country's debt tends to drive up a government's borrowing costs.
The ratings agencies have lost a great deal of credibility with investors for failing to sound the alarm about unsafe mortgage-backed securities that touched off the credit crisis. Their reputation on sovereign ratings, however, remains largely secure.
Still, some investors have begun paying closer attention to credit default swaps, or CDSs, as another means of measuring the risk of default. CDSs on U.S. government debt spiked after the collapse of Lehman Brothers and remain abnormally high, but are now about one-third of a recent peak reached in early March.
Unlike Japan, where foreigners held less than 8 percent of government bonds as of September 2008, the United States relies heavily on foreign buyers to keep its borrowing costs low. A sovereign downgrade would no doubt spook some of those buyers.
Total U.S. government debt outstanding was at $11.27 trillion as of Thursday. (The Treasury Department tracks it down to the penny -- $11,270,547,397,564.64.) China and Japan alone held more than $1.4 trillion of U.S. Treasury bonds as of March, according to Treasury data.
The total debt is equal to about 80 percent of total U.S. output. By comparison, Japan's public debt as a percentage of gross domestic product was 170 percent as of 2008, according to the CIA's World Factbook, second only to Zimbabwe.
SHORT TERM, LONG TERM
But the U.S. picture for 2010 looks gloomier, and has led some economists to question whether the country's fiscal position still warrants a top-tier rating. The International Monetary Fund expects the debt-to-GDP ratio to hit 97.5 percent next year.
"The triple-A rating is undeserved," said Peter Morici, a professor of international business at the University of Maryland. "Because the U.S. can print its own money, it won't formally lose its AAA, but in reality, the bonds are as risky as bonds that are below AAA."
"If Washington were a state capitol, we would have lost the AAA with the current budget," he added.
Ratings agency Standard & Poor's reaffirmed its AAA sovereign rating for the United States in January, but cautioned that the hundreds of billions of dollars committed to bailing out the banking sector would lead to a "noticeable deterioration in the U.S. fiscal profile."
President Barack Obama has said repeatedly that the United States needed to increase spending now to cushion the blow of a deep recession, but must address longer-term fiscal problems once the economy regains its footing.
That will entail some politically unpopular choices, and it is not clear whether Obama or Congress will be prepared to make them. At the top of the list is entitlement spending, namely Social Security benefits and the Medicare health program for the elderly.
A government report released on May 12 found that the Social Security trust fund would be exhausted by 2037, four years earlier than previously estimated, and the Medicare hospital trust fund would become insolvent by 2017, two years earlier than thought.
Threats to cut those benefits invariably provoke howls from the 72 million-strong Baby Boomer generation born between 1946 and 1964. Lawmakers probably won't want to anger such a large group with midterm congressional elections looming in 2010.
But economists see little choice but to address the problem if the United States is going to shore up its finances and ensure that its credit rating stays AAA -- and its creditors remain confident in the country's fiscal future.
David Walker, chief executive of the Peter G. Peterson Foundation and a former U.S. comptroller general, raised those concern in a Financial Times opinion piece last week.
"For too long, the U.S. has delayed making the tough but necessary choices needed to reverse its deteriorating financial condition," he wrote. "One could even argue that our government does not deserve a AAA credit rating based on our current financial condition, structural fiscal imbalances and political stalemate."
(Editing by Leslie Adler)