More Gloomy Economic News

Moody’s reports that the US and the UK are getting close to losing their AAA credit ratings.

Bloomberg: The U.S. and the U.K. have moved “substantially” closer to losing their AAA credit ratings as the cost of servicing their debt rose, according to Moody’s Investors Service.The governments of the two economies must balance bringing down their debt burdens without damaging growth by removing fiscal stimulus too quickly, Pierre Cailleteau, managing director of sovereign risk at Moody’s in London, said in a telephone interview.

Under the ratings company’s so-called baseline scenario, the U.S. will spend more on debt service as a percentage of revenue this year than any other top-rated country except the U.K., and will be the biggest spender from 2011 to 2013, Moody’s said today in a report.

“We expect the situation to further deteriorate in terms of the key ratings metrics before they start stabilizing,” Cailleteau said. “This story is not going to stop at the end of the year. There is inertia in the deterioration of credit metrics.”

The pound fell against the dollar and the euro for the first time in three days, depreciating 0.8 percent to $1.5090, while the dollar index snapped a four-day drop, adding 0.3 percent to 90.075.

The U.S. government will spend about 7 percent of its revenue servicing debt in 2010 and almost 11 percent in 2013, according to the baseline scenario of moderate economic recovery, fiscal adjustments in line with government plans and a gradual increase in interest rates, Moody’s said.

Under its adverse scenario, which assumes 0.5 percent lower growth each year, less fiscal adjustment and a stronger interest-rate shock, the U.S. will be paying about 15 percent of revenue in interest payments, more than the 14 percent limit that would lead to a downgrade to AA, Moody’s said.

This isn’t a surprise to anyone who’s been paying attention. You don’t need to be an economist to understand. Too much debt is bad, and a bad credit rating means higher interest rates. It’s a pretty simple concept, really. Ramming through a trillion dollar health care bill isn’t going to help matters.

Other potential bad news:

The Wall Street Journal: The U.S. and China have upped the ante in the high-stakes game of currency policy poker, leading some investors to cut back on their risky bets.

The dollar and yen advanced Monday as investors sought safety, with some of their gains attributed to escalating rhetoric between the two countries.

Recent statements by President Barack Obama and Premier Wen Jiabao on trade and currencies have a sharper edge than before, which raises the specter of a breakdown in bilateral relations that could lead to official sanctions.

For sure, it’s a huge leap to a trade war from the words of Obama and Wen, but currency markets have a proclivity for anticipating a worst-case scenario. With markets already nervous because of concerns about the bumpy recovery of the world economy and the soundness of sovereign debt inside and outside the euro zone, even the hint of a trade war is enough to push investors into traditional haven currencies.

They aren’t saying there’s definitely going to be a trade war, but with this gang in office, nothing would surprise me. With China holding so much US debt it makes me nervous.