If projections from the Congressional Budget Office hold true, a debt crisis will hit the U.S. by 2018 — and if those projections prove to be too optimistic, the crisis will be here by 2013, says Moody’s Investor Service.
The key data point is the size of federal interest payments on the public debt as a percentage of tax revenue. For the U.S., debt service of 18 to-20 percent of federal revenue is the outer limit of AAA-territory, says Moody's managing director Pierre Cailleteau.
Under the Obama budget, interest would top 18 percent of revenue in 2018 and 20 percent in 2020, CBO projects.
However, under more adverse scenarios than the CBO considered, including higher interest rates, Moody's projects that debt service could hit 22.4 percent of revenue by 2013.
"Nobody knows when you bump up against the limit, but you know when it happens it will really hurt,” fiscal watchdog Maya MacGuineas of the Committee for a Responsible Federal Budget told Investors Daily.
Moody's says the metric to watch is interest payments as a percentage of tax revenue.
A future downgrade would increase the yields required by investors from U.S. debt, making this metric look worse and increasing the risk for further downgrades in a similar fashion to what we have been watching in Europe.
The U.S. Federal Reserve has announced it would open currency swap lines with the ECB, printing dollars and exchanging them for euros to provide some liquidity for European money markets and banks, The New York Times reports.
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