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Anemic growth could threaten US Aaa rating--Moody's

NEW YORK, Feb 3 (Reuters) - If the U.S. economy grows anemically, already stretched government finances will be crimped, potentially putting downward pressure on the top Aaa U.S. rating, said Moody’s Investors Service on Wednesday.

“Economic growth is very important to our assessment (of the sovereign rating),” said Steven Hess, senior credit officer in the sovereign risk group with Moody’s Investors Service in New York.

The Obama administration has based its projections of reducing the budget deficit over time on solid economic growth forecasts, but Hess warned that productivity might be lower than before the global financial crisis.

“Right now we are semi-optimistic that the U.S. will regain its previous dynamism, but if it doesn’t, then we have to think about what that implies for government finances,” Hess said in a telephone interview with Reuters.

“The implications would not be good if the U.S. were in for anemic growth for some time to come because the government could have problems for revenue growth,” Hess added.

The White House projects that the budget deficit for the fiscal year ending Sept. 30 will amount to 10.6 percent of gross domestic product, the highest level since World War Two.

The White House predicts deficits will fall to 3.9 percent by 2014, still above the 3 percent of gross domestic product that economists consider sustainable.

Hess warned that U.S. households balance sheets “need to be improved and this will take some time” as Americans reduce high debt levels in the aftermath of the financial crisis and prolonged recession. That process will put a ceiling on consumer spending and potentially restrain growth, he said.

If the Obama administration’s budget projections for rising interest payments on government debt are realized, “at some point, we don’t know when, there would be downward pressure on the U.S. rating,” Hess said.

In the budget, the U.S. economy is projected to expand by 2.7 percent in 2010, accelerating to an above-average 3.8 percent in 2011 and rising above 4 percent for the following 3 years.

“We think that either economic growth has to be much more vigorous than the administration is assuming so that revenues would be higher or they need to do something further to increase revenues or cut expenditures,” Hess added.

Although systemic risks in the banking system are starting to abate, Hess said, the reluctance of banks to lend may still constrain U.S. growth.

“The financial system itself is perhaps more conservative in its willingness to give credit to the economy. That, combined with lower consumption growth, indicates that maybe the economy will not be so dynamic in the next few years,” he said. (Additional reporting by Dena Aubin, Andy Sullivan, Alister Bull and Jeff Mason; Editing by Kenneth Barry)