US debt-to-GDP ratio worst since 1950s

[Naveed Yaseen]

NEW YORK, Oct 4: Combined US government debt is set to rise to levels unseen since the 1950s, but the US should nevertheless be able to hold onto its AAA credit rating, the Fitch ratings agency said.

“If all fiscal commitments announced to date materialise and are full by the end of 2009, the general (ie federal plus state, regional and local) government fiscal deficit would rise to 10 per cent of GDP in 2009 and general government gross debt would exceed 70 per cent of the GDP for the first time since the 1950s,” it said in a statement.

“The US will likely overtake France and Germany to become the most indebted ‘AAA’ rated sovereign next year,” added Brian Coulton, managing director in Fitch’s sovereigns rating group.

“Nevertheless, there is sufficient headroom within the tolerances of the US AAA rating to absorb a sizeable near-term fiscal deterioration arising from measures to stabilise the financial system and prevent an excessively deep and prolonged recession.”

Fitch said US government support for the financial sector -- including the Troubled Asset Relief Programme adopted on Friday -- did not fundamentally alter its current perspective on the AAA sovereign debt rating.

The agency affirmed the AAA rating with a “stable outlook” back on Sept 7.

In Washington, the US Treasury said it had taken on Barclays Global Investors and State Street Corp to manage the mortgage debt purchased in its takeover of Fannie Mae and Freddie Mac.

Officials said they had begun purchases of the debt last week following the nationalisation a month ago of the two government-sponsored, shareholder-owned financial firms.

The contracts signed were not directly related to the financial bailout approved by Congress on Friday, but the Treasury may use outside firms to buy up distressed mortgage securities under that plan as well.

The deals were signed with British bank Barclays’ New York branch, which took over some of the operations of Lehman Brothers when it failed last month, as well as State Street Bank and Trust Company, a large asset manager.

The deals provide the firms with 0.03 per cent of the first $5 billion in assets and 0.02 per cent of the next tranche. For amounts above $10 billion, they will receive 0.01 per cent.

On September 7, the US government took over ailing mortgage giants Fannie Mae and Freddie Mac and placed them in a “conservatorship” in a bid to avert a financial system meltdown from the housing crisis.—AFP

http://www.dawn.com/2008/10/05/ebr11.htm