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US, Germany, France and UK face junk debt status
By Päivi Munter in London-Financial Times
Published: March 20 2005 21:35 / Last updated: March 20 2005 21:35
http://news.ft.com/cms/s/3460ab64-9982-11d9-ae69-00000e2511c8.html

Rapidly rising pension and healthcare spending will reduce the debt status of the world's richest industrialised countries to junk within 30 years unless their governments move quickly to balance budgets and reduce outgoings, a report published on Monday warns.

Standard & Poor's, the credit ratings agency, says if fiscal trends prevail, the cost of ageing populations will fuel downgrades of France, the US, Germany and the UK from investment grade to speculative, or junk, category France by the early 2020s, the US and Germany before 2030 and the UK before 2035. They are currently in the top Triple A category, ensuring they can borrow at low rates.

The debt ratios of these countries are set to reach levels not seen since the second world war, S&P says. Moritz Kraemer, credit analyst at S&P, says: “Without further adjustment either to current fiscal stance or to social and healthcare costs, the general government debt ratios of France, Germany and the US will surpass 200 per cent. This will result in deficits more akin to those associated with speculative grade sovereigns.”

All big industrialised nations face the problem of large unfunded pension liabilities and rising healthcare costs as populations age. Most have responded with limited moves to make benefits less generous.

ChartBut S&P's projections already factor in the reductions in public sector pensions made by Germany and Italy last year.

The agency estimates that according to current trends US general government debt will soar to 239 per cent of gross domestic product by 2050, against 65 per cent today. France's will reach 235 per cent against 66 per cent, Germany's 221 per cent against 68 per cent, and the UK's 160 per cent against 42 per cent. Italy, which has run more disciplined budgets because of its already-high debt burden, will see its ratio fall to 91 per cent from 104 per cent, assuming it maintains the current trend.

S&P said last year the debt ratio of Japan, the most heavily indebted industrialised country, was set to surpass 700 per cent of GDP by 2050.

The agency's model shows countries can ease the impact of ageing by running tight budgets before demographic pressures peak. The US has healthier demographic trends than Europe but its budget deficit will add to the pain when population ageing accelerates about 2020.