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Table of Contents:

Global Economic Recovery,but Fiscal Crisis Remains 21. Where Is the Aaa-Aa Demarcation Zone? 42. Mapping the Near Future Our Scenarios63. The Vulnerable, the Resilientand the Resistant: A Reminder 74. Updates on the Four Largest

Aaa Countries 8France 8Germany 10United Kingdom 12United States 14

5. Updates on SelectedOther Aaa Countries 17

6. Special Focus: How Do We Measure DebtFinanceability? 21Appendix: Debt Projections 25Moodys Related Research 28

Analyst Contacts:

London 44.20.7772.5454

Pierre CailleteauArnaud Mars

Frankfurt 49.69.7073.0700

Dietmar HornungAlexander Kockerbeck

New York 1.212.553.1653

Steven HessAnalytical Coordinator for this issue

December 2009

Now that the worst of the financial and economic crisis appears to be behind us,

there are three major challenges facing the eight Aaa-rated sovereigns France,

Germany, UK, US, Austria, Luxembourg, New Zealand and Switzerland that are

discussed in this second issue of MoodysAaa Sovereign Monitor.

1. Some countries will struggle to deal with the very large fiscal imbalances andaccumulated debt that have resulted from the global crisis.

2. The sustainability of the recovery that now seems to have begun is open to

question. Economic growth will be an important factor in supporting (or not)

fiscal consolidation.

3. The currently abnormally low interest rates are unlikely to last, and will be

replaced by higher interest rates that will affect the affordability of the much

larger debt burdens that some Aaa governments now carry.

In 2010, Aaa governments with stretched government balance sheets will be unde

pressure to announce credible fiscal plans and if financial markets start losing

patience to start implementing them. This will complicate the recovery and test

political cohesion.

This report analyzes these challenges for the four largest Aaa governments and

selected others with the help of detailed charts for each country. In addition, a

special section at the end of this report discusses the concept of debt

financeability a key characteristic that all Aaa governments are endowed with

and the varying degrees to which Aaa governments are able to issue debt to

meet their financing needs.


2/292 December 2009 Quarterly Monitor Aaa-Sovereign Monitor

Quarterly Monitor Moodys Aaa Sovereign Moni

Global Economic Recovery, but Fiscal Crisis Remains

The global economy has stabilized and is recovering from the recession. Eastern Asia (including Aaa-rated

Singapore) is recording the most rapid recovery. Three of the four largest Aaa-rated countries that are covered

in this Monitor also recorded positive growth in Q3. Indeed, the US and the Eurozone as a whole reported

increases in real GDP, although the Eurozones rate of increase was not impressive. However, the UKeconomy continued to decline. Figures are not yet available for all other countries, but it appears very likely

that Australias growth was sustained, and Canada eked out a small positive increase during the quarter.

Nevertheless, questions remain about the durability of the recovery. The effects of the financial crisis and

global downturn on the fiscal and debt positions of Aaa governments are still unfolding and likely to be long-

lasting. Moodys considers government financial strength i.e. the future trajectory of the governments debt

and its affordability to be the primary and currently most crucial rating consideration for Aaa-rated

sovereigns. We believe that the other rating factors economic and institutional strength as well as

susceptibility to event risk continue to be supportive of the Aaa ratings of the 17 countries in this category.

Over the next year or two, the extent of the sustainability and strength of the recovery will become apparent.

The questions we will be seeking to address are as follows:

How much of the recent return to growth was due to the stimulus spending by governments and their

expansive monetary policies?

If the stimulus is removed, will growth be sustainable?

Has the crisis lowered the growth trend of some Aaa economies for an extended period?

The answers to these questions, in addition to actual fiscal policies, will be important in determining how and

whether governments can achieve fiscal consolidation or reverse their debt trajectories.

So, while the macroeconomic and financial-system crises may be close to an end, the fiscal crisis in a number

of Aaa-rated countries continues and will last for several years. In 2009, Moodys has downgraded only one

Debt trajectories 2009-2013 - Baseline scenarios

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Aaa Space

Debt Reversibility Band

Countries covered by the Dec. 09 Aaa Sovereign Monitor




Aaa government: Ireland. The lack of rating actions on other Aaa countries indicates that, while most of these

countries have lost altitude within the Aaa space, they retain the characteristics necessary for a Aaa rating.

These characteristics include, among others, a high degree of debt financeability, debt affordability, and

debt reversibility. Moodys approach to measuring debt financeability i.e. the ability to raise debt without it

substantially affecting the cost of the debt is the subject of a special section (page 21).

Debt affordability which is best represented by the ratio of interest payments to government revenue is one

of the biggest uncertainties going forward. In the graphs on individual Aaa countries shown over the following

pages, we have illustrated a range of possible outcomes for this ratio. Under some scenarios, this ratio could

reach problematic levels in the next few years in some countries. However, under the baseline scenario, we

still believe that the trajectory of the debt metrics, while unfavourable in the near term, does not currently

threaten the ratings.

The countries covered in this issue include the largest four Aaas France, Germany, the United Kingdom and

the United States which will feature in every issue of this quarterly publication. In addition, we have shorter

sections on four other Aaa countries: Austria, Luxembourg, Switzerland and New Zealand.

Overall, the European countries are characterized by potential contingent liabilities from their banking systems.Indeed, Luxembourg and Switzerland have very large banking systems in relation to their economic size.

Moreover, the exposure of Austrian banks to Eastern Europe caused some concern at the height of the crisis

and may not have fully materialized yet. In the southern hemisphere, meanwhile, New Zealands banks are

mainly owned by strong foreign banks, but the size of the countrys (and the banks) external liabilities have

also raised questions, now considerably alleviated, about the governments contingent liability. It is worth

noting that Moodys maintains negative outlooks on the banking systems of Austria, Luxembourg, and New

Zealand, reflecting uncertainty over possible losses and, therefore, the size of the contingent liability. This is

also the case with many other countries globally, although Switzerlands system still has a stable outlook.

What To Find in This Report

This quarterly report sheds light on and puts into practice the conceptual framework Moodys uses in analyzingdebt metrics in order to identify rating pressures on Aaa-rated governments. The report also contains a

number of updated data and analytical tools to dimension debt trends under different scenarios.

Section 1 presents our analytical framework and identifies the Aaa-Aa demarcation zone.

Section 2 briefly recapitulates our three scenarios, which differ in their assumptions in terms of economic and

financial recovery.

Section 3 recapitulates a way of categorizing Aaa countries as Resistant, Resilient, or Vulnerable

Section 4 focuses on the four largest Aaa countries (Germany, France, the UK and the US)

Section 5 briefly introduces recent and forthcoming developments in four other Aaa-rated sovereigns (Austria,

Luxembourg, New Zealand and Switzerland).

Section 6 (Special Focus) describes how we understand and measure the concept of debt financeability.

Appendix presents our debt projections in greater detail for the countries that are the focus of this second

issue of the Aaa Sovereign Monitor.




1. Where Is the Aaa-Aa Demarcation Zone?

This section summarizes our analytical approach to differentiating between Aaa and Aa sovereigns, developed

in the Special Comment Why Aaa Sovereigns Get Downgraded.

Moodys approach is based on the following elements:

Governments are rated on the same scale as corporations or banks. However, governments are special

in the sense that they can improve their creditworthiness at the expense of other agents creditworthiness

through taxation and also because they can, in admittedly rare circumstances, influence the cost at

which they borrow. For instance, in the UK we recently saw the FSA requesting banks to buy more gilts to

manage liquidity risk and the central bank purchasing gilts.

The Aaa category does not have an upper boundary. A country can always become more creditworthy.

Therefore, the altitude of a government within the Aaa space matters. As a result, negative economic

and financial news does not necessarily have to translate into a rating downgrade it could simply lead a

country to lose altitude within the Aaa category. For instance, in 2000 the US was clearly flying at a higher

altitude within the Aaa space than it had been in the early 1980s because of the debates about the risk of

the disappearance of federal debt and the rise in the countrys growth potential as a result of a productivity

shock.

This begs the question as to how much altitude a Aaa needs to lose for it cross the Aaa-Aa boundary?

Since the risk of an imminentdefault within the Aa range is no greater than it is in the Aaa range, the

distinction lies in the extent to which debt is an inconveniencerather than whether it would be intolerable.

Our preferred measure is debt affordability (DA) as it synthesizes both the size and the cost of debt. DA is

measured by the share of revenues that must be channelled to repay interest on debt. In extremis,

creditors may compete with the provision of elementary public services. Historically, countries with a DA

ratio in excess of 10% are characterized by a size and a cost of debt that affect policy choices and they

therefore share the same attributes in terms of economic and institutional strength and susceptibility to

event risk. In other words, at this ratio, there is a debt problem although within the Aaa range we expect

countries to have plenty of time to deal with it.

DA must be looked at in a dynamic way because, ultimately, a sovereign Aaa is not so much characterized

by low debt although this can be the case of course as by the ability to raise a lot of debt at a non-

punitive price in order to address a shock, and the subsequent ability to reverse such a debt increase.

These two characteristics are indicative of the level of the governments balance sheet flexibility: high

financeability and high debt reversibility.

In other words, a Aaa government is a government that enjoys a sufficiently high level of balance sheet

flexibility to allow it to keep debt highly affordable through cycles and crises.




One way of depicting the distance-to-downgrade is proposed below:




2. Mapping the Near Future Our Scenarios

Moodys debt scenarios combine two types of analysis:

a macro-economic scenario based on different economic recovery prospects1 and

a financial stability scenario, based on different recovery prospects for the assets of the financial system

that are now held by governments.

We should note from the start that the size of the debt problem for the Aaa economies that are affected by

the crisis is still largely unknown. Indeed, while Aaa governments public finances are affected in the

traditional way (lower revenues, higher spending in a context of GDP contraction), the financial stability

operations in which governments have guaranteed or purchased assets and taken equity stakes in banks are

hard to evaluate.2

While it would be an exaggeration to rate governments on the assumption that all these operations will result

in a total loss after all, historical experience is much more nuanced it would be too optimistic to imagine

that all this will be entirely neutral for public finances. The final cost, which does not have to be acknowledged

immediately as governments are not marked-to-market, will depend on the vigour of the economic rebound.

We have developed three scenarios by combining different assumptions about macroeconomic trends andrecovery prospects for financial assets. The precise data for the countries are to be found in the Appendix.

Table 1

Medium-term scenarios

Economic Recovery Prospects Financial Recovery Prospects

Benign Scenario

(Green line with triangles onthe debt graphs)

Same as Baseline Financial stability operations are in theend debt-neutral, i.e. the added debt ingross terms is fully offset by a fullrecovery of the assets acquired.

Baseline Scenario

(Blue line with dots)

Central scenario: hook-shaped

economic rebound and moderate fiscaladjustment

Financial stability operations add to net

debt, with recovery rates close tohistorical experience (55% on fiscalmeasures). Recovery time of 5 years.

Adverse Scenario

(Orange lines)

Adverse economic scenario: lowergrowth (by 0.5% each year), lower fiscaladjustment (primary balance lower by1% each year), higher interest rates*

More severe recovery assumptions: 30%on fiscal measures, recovery timehorizon: 10 years.

1See On the Hook Update on Moodys Global Macroeconomic Risk Scenarios 2009-2010, Moodys Global Financial Risk Perspectives, May 2009.

2Moodys government liability map is explained in Moodys Special Comment entitled Not All Public Debt is the Same: Navigating the Public AccouMaze, February 2009.

* In the baseline scenario, we consider the three-month moving average of the country-specific 5 year bond yield for 2009, to which we add 100 basis po(bps) for 2010, and an additional 100 bps for 2011. In the adverse scenario, we add 100 bps in 2010, and an additional 100 bps in 2011 to the baseyield. The assumed increases refer to the market yield, not to the effective interest rate on the countrys debt.
http://www.moodys.com/cust/getdocumentByNotesDocId.asp?criteria=PBC_117203http://www.moodys.com/cust/getdocumentByNotesDocId.asp?criteria=PBC_114612http://www.moodys.com/cust/getdocumentByNotesDocId.asp?criteria=PBC_114612http://www.moodys.com/cust/getdocumentByNotesDocId.asp?criteria=PBC_114612http://www.moodys.com/cust/getdocumentByNotesDocId.asp?criteria=PBC_114612http://www.moodys.com/cust/getdocumentByNotesDocId.asp?criteria=PBC_117203




3. The Vulnerable , the Resilient and the Resistant:A Reminder

These three categories reflect Moodys view that, while all Aaa governments were affected by the synchronized

global crisis, there were differences in the extent of the impact on each Aaa-rated country and its ability to

respond. Below we recap the key features of these three categories. Note that at present there are no

vulnerable Aaa governments, although Ireland was classified as vulnerable before being downgraded. There

are two resilient governments, the US and the UK. The rest of the countries are considered resistant.

RESISTANT

These are Aaa countries that started from acomparatively robust position and/or are not undergoinga lasting challenge to their economic model or facing amassive risk of crystallization of contingent liabilities.While resistant, they are clearly not immune. Debt mayincrease, but not to the extent of stretching

affordability beyond a level consistent with a Aaa status.The typical resistant Aaa is Canada. Germany andFrance are also resistant, but clearly more weakened bythe crisis.

In the debt graphs, these are countries that remainclear of the debt reversibility zone in thebaseline scenario and well below the top of thatzone in the unlikely adverse case.

RESILIENT

These are the Aaa countries whose public finances aredeteriorating considerably and may therefore test theAaa boundaries, but which display, in our opinion, anadequate reaction capacity to rise to the challenge andrebound. These countries are rated Aaa more because oftheir balance sheet flexibility than because of

their current or projected debt levels over the next fewyears.

The typical resilient Aaa is the USA.

In the debt graphs, we see a considerabledeterioration of debt metrics, which, in the adversescenario, may even exceed the top of the debtreversibility zone. However, the low probability weassign to the adverse scenario, combined with theample adjustment capacity, justifies thecharacterization as resilient.

VULNERABLE

These are the Aaa countries whose public finances faceeven greater challenges and seem to be stretched beyondthe point of no return to the Aaa category. Time isworking against such countries and they are less likely toretain their Aaa rating however, they can nonetheless doso if they display a 'back-to-the wall' adjustment capacitythat exceeds expectations. We are therefore monitoringthe near-term prospects in terms of debt reversibility.

The typical vulnerable Aaa was Ireland (prior to itsdowngrade in July 2009).

In terms of debt graphs, vulnerable Aaa countrieshave weaker debt metrics than "resistant" Aaas andweaker debt reversibility capacity than "resilient" Aaas.




4. Updates on the Four Largest Aaa Countries

France: A Resistant Aaa

Growth Trend Now Positive, But Still Subdued

The French economy has absorbed the shock of the financial and economic crisis with less damage than

some of its peers, suffering a peak-to-trough contraction in output of only 3.5%. Frances growth turned

positive again in Q2 2009, at the same time as that of Germany and ahead of that of other large advanced

economies. It confirmed its timid recovery in Q3 with a further 0.3% increase, and now seems likely to remain

on a moderately positive trend throughout 2010. The resilience of the French economy is explained, on the

one hand, by its lower vulnerability to the features of this particular global crisis (e.g. lower reliance on the

financial sector than the UK, lower household indebtedness than in the US or Spain, lower reliance on exports

than Germany) and, on the other hand, by the measures taken by the government to support domestic

demand.

The large size of the government sector in the French economy has helped to cushion the shock initially, as

government expenditure is, if anything, counter-cyclical in nature. Automatic stabilizers have also played their

role fully. The public deficit has risen to an expected 8.2% of GDP in 2009, and is projected to further increasemarginally to 8% in 2010, when an improvement in the central governments position is expected to be offset

by an increase in social security deficits (impacted notably by the rise in unemployment, with a lag).

The very large size of the government sector in France is, however, a double-edged sword. On the one hand,

it benefits debt affordability in the sense that government revenues are large in comparison to those of other

countries with similar levels of public debt. On the other hand, it casts a shadow on the degree of debt

reversibility in France.

Fiscal Flexibility Constrained by Already Large Public Sector and H ighTaxation Levels

As the government already levies a substantial share of the countrys resources, the ability to increase taxation

further without depressing economic potential is questionable. Indeed, the governments 2010 budget does notinclude an increase in taxation nor a significant adjustment on the expenditure side. Instead, it envisages rising

expenditure at a rate of 1% per annum in real terms (reducing only very slowly the ratio of expenditure to GDP,

from a very high level of almost 56% in 2009 and 2010).

This strategy implies that a reversal of the current erosion of debt metrics hinges disproportionately on an

acceleration of growth, above and beyond the 2% annual trend that prevailed prior to the crisis. This was

stated explicitly by President Sarkozy in his address to the Parliament in June 2009, when he rejected the

concept of a policy of austerity to reduce Frances public deficit and debt and instead outlined a policy of public

investment, with the aim of generating higher growth and therefore higher revenues over time.

The large size of the government sector in the economy is not supportive of this acceleration, since its

contribution to growth will be constrained by the cap on expenditure for several years to come. President

Sarkozys policy of public investments (known as the grand emprunt) may eventually contribute to enhancingthe economys potential, but Moodys considers its size (1% of GDP) too limited and its net effect too

uncertain for it to improve the reversibility of Frances debt metrics.3 Without such an improvement in debt

reversibility, the ongoing deterioration of government debt affordability will slowly erode the countrys (still

significant) distance-to-downgrade.

3See Moodys Special Comment Frances Grand Emprunt: A Short-Term Cost for an Uncertain Long-Term Gain, November 2009.
http://www.moodys.com/cust/getdocumentByNotesDocId.asp?criteria=PBC_121223http://www.moodys.com/cust/getdocumentByNotesDocId.asp?criteria=PBC_121223




France: Moderate erosion in distance to downgrade

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Nominal GrowthSensitivity

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Interest RateSensitivity

Uplift/Discount applied2010

2011onwards 2010

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2011onwards

VF Very Favorable +1%p +2%p -1%p -2%p - -

F Favorable +0.5%p +1%p -0.5%p -1%p -50bps -100bps

S Severe -0.5%p -1%p +0.5%p +1%p +100bps +200bps

VS Very Severe -1%p -2%p +1%p +2%p +150bps +300bps

Distance to Downgrade - Main Scenarios Interest Rate Sensitivity

Fiscal Adjustment Sensitivity Nominal Growth Sensitivity




Germany: A Resistant Aaa

Relatively well placed to absorb the fiscal and economic shock, butunemployment and banks may weigh on the recovery

Germany has been particularly hard-hit by the effects of the global recession because the shock has comefrom exports, the main driver of its economic growth. At the same time, Germany seems better placed to

recover momentum than a number of other European countries whose economies are seriously impaired by

high private indebtedness and the collapse of over-inflated financial and construction sectors.

Germanys real GDP is projected to grow by around 1.2% in 2010 and 1.8% in 2011. A rebound in exports

helped the German economy to bounce back in Q2 2009. Since this export recovery was boosted mainly by

global stimulus measures, its sustainability will be tested. The ongoing deleveraging of the private sector in

many countries will continue to constrain export growth potential. However, in light of Germanys high cost

competitiveness mainly based on former adjustment efforts in the aftermath of German unification and its

expertise in supplying investment goods, the country should be well placed to benefit from a global recovery.

There are further factors that challenge Germanys growth outlook. Private consumption and German banks

financial strength remain potential constraints for a stronger economic recovery. The expected rise inunemployment will weigh on private consumption in 2010 when companies will in turn be forced to align their

workforce with smaller order books. Government labour market support measures have so far delayed this

process. Moreover, the capital base of German banks has been substantially weakened by the financial crisis.

In addition, bank balance sheets face the risk of increasing losses in their loan books as a result of a potential

surge in insolvencies. Therefore, a further stabilization of the banking sector will be important to secure access

to finance for the corporate sector.

Germanys debt affordability and reversibility expected to remain very

high, but further fiscal adjustment capacity will be tested

Germany entered the global recession in a relatively solid fiscal position, with a balanced general government

budget in 2008. However, as in many other countries around the world, the cost of adjusting to the crisis will

be high and a large portion of the burden will be absorbed by the public sector. Germany's government debt isprojected to rise significantly, approaching 80% of GDP by 2011 on the back of new borrowing, only moderate

economic growth and costly financial and economic stabilization measures. The coalition programme of the

new Christian-Liberal government seems to continue to prioritize economic support measures over fiscal

consolidation - at least temporarily. The programme contains further stimulus measures to provide (tax) relief

to households and enterprises and to increase public infrastructure investment. At the same time, automatic

stabilizers are allowed to fully operate. As a consequence, the general government balance will turn into a

deficit of close to 3% of nominal GDP in 2009. The deficit ratio is expected to increase to around 5% of GDP in

2010 and 2011, thereby further adding to a rising public debt ratio.

Germany and other highly rated sovereigns will not be able to rely on robust growth to help them reverse their

debt trajectories. Fiscal adjustment capacity, especially through expenditure control, will be of increasing

importance. In that respect, the recent decision to introduce a public "debt brake" to limit the structural deficit at

all levels of government is a supportive factor in terms of debt reversibility, provided the rules are observed.

The new fiscal rule is anchored in the German constitution and stipulates a ceiling of 0.35% of GDP for the

structural deficit of the Federal government as of 2016. The German Lnder will be forced to present balanced

structural budgets as of 2020. These rules require fiscal consolidation from 2011 onwards. The governments

ability to adhere to the rules will be tested, especially if tax and other support measures do not bring about the

targeted economic recovery. This also means that the governments capacity and willingness to better control

expenditure will be further tested.




Germany: Still well w ithin Aaa space in all but severe scenarios

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2011onwards 2010

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United Kingdom: A Resilient Aaa

Inexorable deterioration of debt affordability as a long recession takes

its toll

The UK economy entered the crisis in a vulnerable position, owing to the (overly) large size of its banking

sector and the high level of household indebtedness. Both continue to weigh on economic performance. Netbank lending to the UK business sector has continued to contract through Q3 2009, and repairs to household

balance sheets (i.e. the rising savings ratio) may weigh on demand for some time to come. Based on

preliminary data, the UKs GDP has fallen for the sixth consecutive quarter, resulting in a cumulative

contraction of output by 5.9% so far from its peak. Other indicators, however, suggest that the UK economy

has already started to expand again, and will continue to recover throughout 2010.

The depth of the crisis has been mirrored by the ongoing deterioration of public finances (with gross debt/GDP

having risen from 44% at the end of 2007 to an estimated 69% at the end of 2009). It also raises considerable

challenges going forward, as the downward adjustment of potential output during the crisis will result in a

recurrent shortfall in tax revenues, which, if not compensated by a parallel adjustment in expenditure, would

leave the government with a permanent deficit. The structural public deficit, which was already in excess of 3%

prior to the crisis, now stands above 10% of GDP, according to the European Commission. The result, as

illustrated by the debt trajectory charts on page 13, is an inexorable deterioration of debt affordability in theshort term under almost all foreseeable scenarios.

Considerable debt financeability offers the government time to react

Against this background, the characterization of the UK Government as a resilient Aaa issuer is supported by

a very high degree of debt financeability and an equally high assessment of debt reversibility.

Over recent months, the UK Debt Management Office has issued inflation-linked gilts across the maturity

spectrum at real yields close to or even below 0.5%. As this is a very low yield in comparison to the medium-

to long-term growth potential of the economy (hence trend growth in revenues), very favourable funding costs

will (all other variables remaining equal) contribute to an improvementin debt affordability over time.

Demand for gilts has also been supported by the Bank of Englands quantitative easing operations (with 181

billion of gilts purchased since March about the same as total government issuance over the same period).

This has been supplemented by regulatory pressure by the Financial Services Authority on banks to purchase

government bonds to build up liquidity buffers. While both measures only generate demand temporarily, they

contribute significantly to the ability of the government to borrow very large amounts on favourable terms. A

high degree of financeability does not substitute for fiscal adjustment, but offers the government time to

prepare and implement this adjustment.

Public consensus on the desirability of fiscal retrenchment suggestsgenuine capacity to repair the damage

Moodys assessment that the UK government exhibits a high degree of debt reversibility is supported by the

trend over recent months towards an apparent consensus among the public that fiscal retrenchment (including

cuts in expenditure) is both inevitable and desirable. This broad-based consensus is reflected in the stances of

the UKs three main political parties towards fiscal policy going forward. It effectively increases the room for

fiscal manoeuvre of the government that will emerge after the general elections due to take place by June

2010, by which time economic recovery is likely to be more solidly anchored. While assumedcapacity for

fiscal adjustment currently supports the maintenance of the Aaa rating of the UK government, this assumption

will have to be validated by actions in the not-too-distant future to continue to provide support for the rating.




The UK: Fiscal adjustment effort to test resiliency

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BS

VS

VF F 2013

2008





2011onwards 2010

2011onwards 2010

2011onwards










United States: A Res ilient Aaa

GDP growth is back, but how strong is it?

The US economy returned to positive real GDP growth in Q3 2009, following negative growth in five of the

previous six quarters. The annualized growth rate of 2.8% during Q3 was led by personal consumption, and

there is a question about the sustainability of this trend given the situation of household balance sheets.

Residential construction was also quite strong, and the large inventory of unsold homes indicates that this

factor is likely to fade in coming quarters.

The governments stimulus plan appears to have been an important factor in the resumption of growth, and the

initial impact was primarily through tax measures. However, infrastructure spending will continue into 2010.

Nonetheless, it is uncertain whether the initial impact of the stimulus will wane. Overall, Moodys expects the

rebound from the recession to be relatively modest compared to the patterns observed following previous

recessions. Real GDP growth of 2.0-2.5% in 2010 will undoubtedly help government revenues, but will not yet

be high enough to make major progress in reducing the budget deficit.

Debt rising to new highs

US federal government debt is rising rapidly. At the end of the last fiscal year (September 30), the ratio of debtto GDP had risen to 53.5% from 40.2% one year earlier. However, it is notable that the ratio of interest

payments to government revenue declined from 10.0 % to 8.4%, despite the sharp rise in the debt

outstanding, a clear indication that US debt financeability is strong. By our measure, discussed in the special

focus article in this publication, it is the strongest of any country.

However, under our baseline case, which relies on figures in the government budget, federal government debt

and interest costs will rise considerably between now and 2012, with debt to GDP reaching 70% and interest

to revenue (affordability) climbing to 13%. Under an adverse scenario, which Moodys does not consider likely,

debt affordability could become a problem as interest payments would exceed 18% of revenue - the historic

high for this indicator that was reached during the 1980s. As the graphs on the following page indicate, such a

scenario would also lead to a ratio of federal debt to GDP of around 80%, which would be by far the highest

level since the Second World War.

Recently, the announcement that Bank of America will redeem the $45 billion in government-owned preferred

shares means that recoveries under the Treasurys Capital Purchase Program (part of the Troubled Asset

Relief Program), at about $115 billion, are now more than 50% of the amount initially purchased. Recoveries,

of course, mean that debt issuance to finance the budget deficit is less than it otherwise would be.

The forecast for general government debt (including state and local governments and certain pension

liabilities), which we use for international comparison purposes, is somewhat better on the affordability front,

with the ratio of interest payments to GDP remaining below 10% throughout 2010. This is comparable to the

ratios for large European Aaa-rated governments.

Next Year: A Fiscal Consolidation Strategy?

With the federal budget deficit at 10% of GDP in the previous fiscal year and a projected negative balance of

9.1% during the current fiscal year, it is clearly necessary to bring the deficit down to a sustainable level to

avoid an unsustainable upward trajectory in debt ratios in the future. The latest budget documents show the

deficit going down gradually to around 4% of GDP by 2015 and stabilizing at that level. Administration officials

have said that the next budget, which will be presented in February 2010, will include measures to reduce the

deficit to a lower level in order to prevent debt from reaching the levels implied by the current projections. A

credible fiscal consolidation strategy would reduce the risk of higher interest rates and therefore a major

deterioration in debt affordability that could come from a decline in confidence in financial markets. Without

such a strategy, the federal governments interest payments could come closer to those in the adverse

scenario.




USA General Government

Assessing debt reversibility will become important in coming years

4

6

8

10

12

14

16

18

60 70 80 90 100 110 120

Debt/GDP (%)

InterestPaym

ent/Revenue

(%

)

Adverse scenar io Benign scenario Baseline scenario

Reversibility band

Aa Space

20082010

2011

2012

Aaa Space

2009 2010

2011

2012

2013

2013

2007

4

6

8

10

12

14

16

18

60 70 80 90 100 110


Reversibility band

Aa Space

20072009

2010

2011

2012

VS

S

B

F

2013

2008

4

6

8

10

12

14

16

18

60 70 80 90 100 110 120

Debt/GDP (%)

InterestPaym

ent/Revenue

(%

)Aaa Space

Reversibility band

Aa Space

20072009

2010

2011

2012

BS

VS

VF F 2013

2008

4

6

8

10

12

14

16

18

60 70 80 90 100 110


Reversibility band

Aa Space

20072009

2010

2011

2012

B SVS

VFF 2013

2008





2011onwards 2010

2011onwards 2010

2011onwards





Distance to Downgrade Main Scenarios Interest Rate Sensitivity





USA Federal Government

Interest costs and interest-rate sensitivity are rising

4

6

8

10

12

14

16

18

20

22

24

26

35 45 55 65 75 85

Debt/GDP (%)

InterestPaym

ent/Revenue

(%

)

Adverse scenar io Benign scenario Baseline scenar io Aa Space

2008

2010

2011

2012

Aaa Space

2009 2010

2011

2012

2013

2013

Historical High - Early 1990's

2009 2010

2007

4

6

8

10

12

14

16

18

20

22

24

26

35 45 55 65 75


Aa Space

2008

2009 2010

2011

2012

VS

S

B

F

2013


2007

4

6

8

10

12

14

16

18

20

22

24

26

35 45 55 65 75 85

Debt/GDP (%)

InterestPaym

ent/Revenue

(%

)Aaa Space

Aa Space

2008

2009

2010

2011

2012

BS

VS

VFF

2013


2007

4

6

8

10

12

14

16

18

20

22

24

26

35 45 55 65 75


Aa Space

2008

2009

2010

2011

2012

BS VS

VF F 2013


2007





2011onwards 2010

2011onwards 2010

2011onwards





Distance to Downgrade Main Scenarios Interest Rate Sensitivity





5. Updates on Selected Other Aaa Countries

Austria and Luxembourg: Resistant Aaas

Recent and Forthcoming Developments

Debt Growth Fiscal Consolidation

Austria The measures taken in 2008 to supporteconomic and financial marketsgenerated increases in gross generalgovernment debt in relation tonominal GDP. The general governmentdebt ratio is expected to rise toaround 77% of GDP in 2011 from alevel slightly below 60% in 2007. As inthe case of Germany, Austriasrelatively solid public finances at thebeginning of the crisis offer

substantial room for manoeuvre andshock absorption withoutcompromising the countrys very highdebt affordability. However, Austrianbanks substantial exposure to Centraland Eastern Europe caused marketconcerns in early 2009. We haveemphasized that almost 75% of suchexposure resulted from business inmore advanced and integrated EUcountries. Furthermore, recent stresstests run by the OENB seem to confirmthat increased provisioning and highercapitalization mean increased lossabsorption capacity at the bank level.

There are no important structuralimbalances in the real economy or ingovernment finances. Privatehouseholds are not particularly highlyindebted. The savings rate is high.This means that the Austrian economydoes not face brutal adjustment needsduring the crisis. This is comparablewith the situation in Germany.However, fiscal support measures willgradually be phased out. The

production impulse from inventoryliquidation will also fade soon. As aresult, we only expect an anaemiceconomic recovery for Austrias smalland open economy, although this willalso depend on the German economiccycle and world trade. There willprobably be no endogenous economicgrowth in Austria before the end of2010. Austrian real GDP is expected toshrink by around 3.5 % in 2009 and togrow at around 1% in 2010, mainly asa consequence of substantial fiscalaction in Austria and abroad.

Fiscal consolidation will probably nothappen before 2011/12 due to theexpected fragile economic recovery,the extra spending to support theeconomy and the substantial weaknesson the government revenue side. As aconsequence, the general governmentdeficit may head towards 4% in 2009and reach around 5% in 2010 - asubstantial deterioration from anearly balanced position in 2008. As in

other Eurozone countries, the plan isto let automatic stabilizers fully playtheir role in 2009 and 2010, refrainingfrom substantial fiscal consolidationto prevent pro-cyclicality during thisyear and next. The government seesno room for further tax cuts further tothe recent lowering of income taxes.Instead, a broadening of the tax baseis targeted to secure governmentrevenues in the coming years. As inprevious years, fiscal consolidationwill have to focus on healthcarespending and savings through reformsin public administration.

Luxembourg Luxembourgs debt was negligible at

the start of the crisis. Although therescue and recovery packagesimplemented by the authorities arelikely to nearly triple the debtaffordability ratios (i.e. interestpayments/revenues of 1.5%), publicdebt will obviously remain verymanageable at these levels. On theother hand, an effective exit strategyfrom recent stimulus measures oncemacroeconomic conditions improve would be needed to avoid entering avicious circle of high fiscal deficitsand fast-growing debt, especially inview of the long-term spendingpressures stemming from an ageingpopulation.

With a location in the centre of

Europe and the availability of a highlyeducated, multilingual (includingcross-border) workforce,Luxembourgs economy has grownmore rapidly than the Europeanaverage, generating the highest percapita incomes in the EU. However,growth is likely to be constrained inthe future. The financial sector isunlikely to reach its pre-crisis growthlevels for several years at least.Moreover, cost competitiveness hasdiminished, which is expected toreduce the attractiveness of thecountry as a business location.Together, these are expected to leadto a reduction in potential growth anda further deterioration in employmentprospects.

Public revenues are highly sensitive to

the financial sectors performance, soa slow recovery of the sector wouldlikely keep the fiscal position indeficit. Luxembourgs old-age pensionobligations are particularly onerousbecause of the high salary base andthe fact that cross-border workers arealso qualified to receive benefits. Thecountrys small size and wealth mayhelp the authorities achieve a quickand early exit from the stimuluspackage, but some popular resistanceis expected when so many otherEuropean countries are likely tocontravene the Growth and StabilityPact for several more years.




Debt trajectories 2007-2013 - Austria

4

5

6

7

8

9

10

11

12

55 60 65 70 75 80 85 90

Debt to GDP (%)

Interestp

aymentstoGGrevenue(%)

Adverse scenario Benign scenario Baseline scenario

2013

2007

2008

2009

2010

2011

2012

2011 20122011

2010

2013

Reversibility band

20132012

2009

Debt Trajectories 2007-2013 - Luxembourg

0

2

4

6

8

10

12

5 10 15 20 25

Debt/GDP (%)

InterestP

ayment/Revenue(%)

30

2010

20082011

2011

2012

2011

20122013

2013

20072008 2009 2010

20132009

Adverse Scenario Benign Scenario Baseline Scenario Reversibility band




New Zealand and Switzerland: Resistant Aaas

Recent and Forthcoming Developments

Debt Growth Fiscal Consolidation

New Zealand Starting from a low level of debt, NewZealand has experienced a majorchange in its outlook for governmentdebt. The government has alreadyannounced measures to deal with thedeterioration, but debt ratios are stillset to rise through 2013 under thescenario laid out in the budget. From17.5% in 2008, the ratio of debt toGDP is forecast to more than double,but there is a risk it could go evenhigher. Nonetheless, these ratios arestill much lower than they are for anumber of other Aaa countries.

The economy recorded positivegrowth in Q2 2009 after fiveconsecutive negative quarters.However, the growth rate, at just0,1%, was not enough for the economyto be out of the woods yet. A numberof important sectors in the economycontinued to contract. For Q3,indicators including housing, retailsales and net migration indicate thatmomentum probably picked up a bit.The growth outlook has improved for2010, with expected positive growthof around 3%.

Large operating deficits averagingclose to 5% of GDP are forecast tocharacterize the 2010-2012 period,before beginning a gradual decline.Thus, fiscal consolidation will occuronly in the middle of the next decade.This will depend on a pick-up ineconomic growth as well as thegovernments ability to controlexpenditure. Measures to increaserevenues may be necessary at somepoint, particularly if economic growthdoes not resume at a higher level.

Switzerland Switzerland entered the economic

crisis with favourable debt metrics,with general government debt at40.9% of GDP in 2008. Thegovernments support for the financialsystem and three economic stimuluspackages has caused these metrics todeteriorate, with interest payments togeneral government revenue expectedto peak in 2010. Because thegovernment was able to sell its stakein UBS profitably, the government wasable to blunt the impact of its bankrescue on its finances, making theirdeterioration relatively small ascompared to many other Aaa-ratedcountries.

Although the contraction in Swiss

growth is milder than that seen amongmany of its Aaa peers, the countryseconomic recovery is expected to bequite gradual in spite of the fiscalstimulus and the central banksquantitative easing programme.However, business surveys and neworders data indicate that the economymay be turning a corner, although therecovery is expected to be slow andshallow and real GDP growth isexpected to remain largely flat in2010.

The introduction of the debt brake

rule in the early years of this decademeant that Switzerland entered thecrisis with a fiscal surplus. The deficitwill continue to rise in 2010 as furtherstimulus measures are introduced;these have required that an escapeclause in the debt brake rule beinvoked. In early November, theFederal Council announced apreliminary fiscal consolidationprogramme for 2011-2013 that willachieve around SFr1.5bn in annualsavings in order to unwind the impactof stimulus measures on key fiscalmetrics.




Debt Trajectories 2007-2013 - New Zealand

2

3

4

5

6

7

8

9

10

11

12

20 25 30 35 40 45 50 55

Debt/GDP (%)

InterestPayment/Revenue(%)

Adverse Scenar io Benign Scenario Baseline Scenario

2008

2009 2010

2010

2011

2012

2011

2012

2013

2013

Reversibility band

2007

Debt trajectories 2007-2013 - Switzerland

2

3

4

5

6

7

8

9

10

11

12

39 41 43 45 47 49 51 53 55

Debt to GDP (%)

Interestp

aymentstoGGrevenue(%)

Adverse scenario Benign Scenar io Baseline scenario

2008

2010 2011

2013

2013

2012

Reversibility band

20092011

2012

2010

2007




6. Special Focus: How Do We Measure DebtFinanceability?

In a previous Special Comment, we introduced our Aaa debt triangle, which reflects the interplay between its

three components: debt affordability, debt reversibility and debt financeability.

Debt financeability measures the ability of a government to raise a significant amount of debt in its own

currency in order to face a temporary shock, without paying punishing or even elevated interest rates. This

concept can be boiled down to the question of whether there is a likely demand for a sudden significant

increase in the supply of government debt.

This is therefore a forward-looking measure of financial flexibility but one that does not lend itself to a

simple determination. The paragraphs below illustrate oneway to approach the question.

By a significant amount of debt, we mean a level in the region of 10%-20% of GDP, which is consistent with

government borrowing requirements in periods of major financial crises, as we saw recently. When we refer to

not elevated prices, we mean raising debt at spreads close to long-term averages.

There are two key questions to in the assessment of financeability:

How large is the ability of the government to mobilize domestic financial savings?

On the domestic front, the questions are: (1) Is there a pool of savings that can be tapped? and (2) Can the

government effectively mobilize it?

One way to approximate the domestic demand4

for government securities is simply to consider the stock of

the countrys financial assets. There are many indicators of financial depth; but here we choose to look at bank

deposits and bond market capitalisation.5

An alternative is to deduct sovereign debt from the financial stock to

better capture the financial savings that are still untapped we do this as an alternative in Chart 3 below.

As for the question of the capacity to mobilize resources, it is clear that this differs among Aaa countries: the

ability of governments to capture domestic savings to meet their debt issuance needs depends on the attitude

of local investors towards their government.

In some cases, trust is low so that the government cannot raise finance in its own currency. This is the so-

called original sin that has plagued emerging market governments for a long time. To take this situation into

account, we marginally adjust a countrys financial stock by an indicator of original sin (foreign currency

denominated debt/total government debt) when the government borrows more than 30% of its debt in another

countrys currency.

At the other extreme, there are governments that find it easy to divert domestic savings toward their own

bonds (thereby possibly crowding out private sector debt issuance in the process) because of a significant

home bias among investors and a form of loyalty towards the sovereign. This is the case for Japan. This

home bias reflects societal characteristics that have not always been well identified and understood. Hence,

we adjust positively the countrys financial stock by an indicator of portfolio capital outflow variability; the idea

being that the home bias, or the inclination to buy government debt, can be approximated by a high level of

stickiness of capital (i.e. a low volatility of portfolio capital outflows).

In sum, and as reflected in the charts below, we adjust the countrys financial stock in two ways: negatively, by

an original sin factor when the government borrows in a foreign currency for more than 30% of its needs;

positively, by a home bias factor, as indicated by a low variability of portfolio capital outflows.

4Note that, by focusing purely on savings or financial stock, we leave aside the important question of the ability of governments to create an artificdemand for their debt - for instance, by getting the central bank to purchase debt or by altering financial regulation and requiring banks to hold mgovernment debt. This is undoubtedly an element of financeability: some countries can do i t; others cannot do so without triggering a run on the currencHowever, much depends on the elusive concept of trust and credibility, so we do not attempt to measure it here.

5 We do not take equities into account because this skews the outcome in favour of large international stock markets, as it is unclear whether the funds tattract could easily be redirected to government securities.




How large is the ability of the government to mobilize international savings in its own currency?

We address this question by trying to measure the extent to which an increase in debt can also be absorbed

by foreign investors - because the domestic funding currency could be an international currency or, better still,

an international reserve currency.

This concept in turn requires two levels of analysis: (i) whether international investors are naturally willing to

hold the currency of the government (we use the share of a countrys domestic currency in global foreignexchange turnover as a proxy); and (ii) whether the bonds issued by the government are a natural investment

vehicle for their holdings of the currency,

For example, the dominant role (by far) of the US dollar as an international currency means that there is a

large structural demand for USD-denominated assets. The depth of the US Treasury market and the fact that

Treasuries are seen as the undisputed benchmark and safe-haven in the dollar market means that the US

government potentially has access to this larger pool of global savings. This magnifies the level of

financeability of the US government, as explained in the main body of this report.

German and French government bonds also hold the status of benchmarks in the euro market. Hence, these

governments benefit fully or largely from potential international demand for the euro and accordingly have high

levels of financeability although less so than the US government, reflecting the relative international roles of

the dollar and the euro. The UK or Japanese governments, in turn, have a lower albeit still very highfinanceability. Smaller countries with their own currencies generally have somewhat lower financeability.

There are also governments whose bonds are not undisputed benchmarks in their respective currency market.

This is particularly the case of euro area governments other than Germany or France. However, such

governments benefit from issuing their debt in a domestic currency that happens to be a large international

currency. Nonetheless, it would be illusory to conclude that this affords all EMU countries the same degree of

financeability as Germany, as was acutely illustrated by the recent experience of Ireland. In the chart below,

we have accordingly scaled down the scores of euro area governments commensurate with their status in the

euro capital market.

Illustration

The three charts below show how countries fare in the two dimensions explained above: the ability to mobilize

domestic savings on the vertical axis; and the ability to mobilize international savings in their own currencies

on the horizontal axis.

Chart 1 uses a linear scale for the two axes. This shows the significant degree of debt financeability of the US

compared with any other country because of the role of the dollar. The other countries are grouped at the

other side of the graph.

Chart 2 uses a semi-logarithmic scale to provide more granularity but understates the superior financeability

of the US in terms of its ability to tap international savings. This graphs shows that, after the US, very high

levels of financeability are also enjoyed by Germany, Japan (Aa2), the UK, France, as well as by the

Netherlands and Italy (Aa2). Note that Japans very high degree of financeability allows it to keep debt

affordable despite the debts enormous size.

Chart 3 uses another way to calculate the financial stock: it deducts the public debt from the stock of financialassets. In other words, it measures the stock of savings not alreadycaptured by the government and therefore

arguably better reflects the potential that governments have for raising furtherpublic debt. One striking

difference is Japan, which has already used much of its initialfinanceability, with the result that its residual

financeability - while still considerable - has declined.




Char t 1 The US and t he o t hers

United States

-

10

20

30

40

50

60

70

80

90

100

0 5 10 15 20 25 30 35 40 45 50

Ability To Tap International Savings

Dome

sticResourceMobilisationCapa

city

Char t 2 Deb t f i nanceab i l it y ( on a semi - l ogar i t hm i c sca le )

Australia

Austria

Belgium

Brazil

Canada

China

Denmark

Finland

FranceGermany

Greece

Hong Kong

India

Ireland Italy

Japan

Mexico

Netherlands

New Zealand

Poland

Portugal

Russia

Singapore

Slovakia

South Africa

Korea

Spain

Sweden

CHUK

US

-

10

20

30

40

50

60

70

80

90

100

0.1 1 10 100

Ability T o T ap International Savings

DomesticRes

ourceMobilisationCapacity

High ability to attract

international savings

High ability to capturedomestic savings




Char t 3 Deb t f i nanceab i l it y f r om a more f o rw ard - l ook i ng pe rspect i ve

AustraliaAustria

Belgium

Brazil

Canada

China

Denmark

Finland

FranceGermany

Greece

Hong Kong

India

Ireland

ItalyJapan

Mexico

Netherlands

New Zealand

Poland

Portugal

Russia

Singapore

Slovakia

South Africa

Korea

Spain

SwedenCH

UK US

-

10

20

30

40

50

60

70

80

90

100

0.1 1 10 100

Ability T o T ap International Savings

Dome

sticResourceMobilisationCapa

city

Description of the Axis

X-Axis: Ability to Tap International Savings: Score from 1- 50 according to the countrys share of global foreign

exchange turnover. For the Euro countries, we weighted the Euro turnover according to the size of theeconomy.

Y-Axis: Domestic Resource Mobilization Capacity: Score from 1-100 as a measure of financial depth (defined

as Private Sector Credit + Bond Market Capitalization + General Government Debt as % of GDP). We adjust

the score negatively if the ratio of foreign currency denominated debt to total government debt is above 30%

(indicator of original sin). We adjust positively the scores for countries whose ratio of FC denominated debt to

total government debt is below 30%, by the portfolio capital outflow variability (measured as the standard

deviation-to-average of the portfolio capital outflow over the period 1999-2009) as an indication of home bias.




Appendix: Debt P rojections

Debt Projections: Benign Scenario

Average2004 to 2007 2008 2009 2010 2011 2012 2013

Nominal GDP Growth 4.4 2.9 -0.3 2.4 3.1 3.8 4.1

Budget Balance -2.9 -3.4 -8.2 -8.3 -7.8 -7.2 -6.7

Interest Rate 4.3 4.5 4.1 3.9 3.9 4.1 4.3

Debt/GDP 64.7 67.8 75.7 82.1 87.5 91.5 94.6

France

Aaa/STA

Intpaym/Revenue 5.4 5.7 5.9 6.2 6.5 7.1 7.7


Budget Balance -2.2 0.0 -3.0 -4.8 -4.4 -3.1 -2.2

Interest Rate 4.4 4.3 3.9 3.9 3.9 4.0 4.1

Debt/GDP 66.5 62.5 68.7 72.4 75.0 76.6 77.0

Germany

Aaa/STA

Intpaym/Revenue 6.4 6.2 5.7 6.1 6.4 6.9 7.1


Budget Balance -3.0 -5.1 -12.1 -12.6 -11.0 -10.2 -9.0

Interest Rate 5.3 5.4 5.1 4.2 4.2 4.3 4.5

Debt/GDP 42.6 50.9 61.7 73.5 80.2 86.3 90.8

UK

Aaa/STA

Intpaym/Revenue 5.1 5.4 6.9 6.5 7.1 8.0 8.7


Budget Balance -2.3 -3.2 -10.0 -9.0 -7.2 -4.7 -4.7

Interest Rate 4.6 4.9 3.0 2.7 3.0 3.5 3.8

Debt/GDP 37.2 38.9 50.8 63.0 67.1 68.0 69.3

US FG

Aaa/STA

Intpaym/Revenue 8.9 10.0 8.1 8.3 11.0 12.7 14.2


Budget Balance -3.2 -5.9 -12.0 -10.2 -8.2 -5.0 -5.4

Interest Rate 3.3 3.4 2.9 2.6 2.9 3.3 3.6

Debt/GDP 62.2 69.8 84.4 96.7 100.1 99.5 99.9

US GG

Aaa/STA

Intpaym/Revenue 5.8 6.3 6 .6 6 .8 8.2 9.2 10.2

Nominal GDP Growth4.9 4.1 -2.3 2.0 3.1 3.6 3.8

Budget Balance -2.2 -0.5 -4.4 -5.4 -5.1 -5.0 -4.8

Interest Rate 4.7 4.4 4.5 4.4 4.3 4.4 4.4

Debt/GDP 62.6 61.8 67.4 72.2 75.1 77.5 79.5

AustriaAaa/STA

Intpaym/Revenue 5.9 5.2 6.0 6.2 6.4 6.7 6.9


Budget Balance 1.0 2.5 -2.2 -4.0 -4.1 -1.8 -0.7

Interest Rate 3.5 4.8 4.2 4.2 4.1 4.3 4.3

Debt/GDP 6.4 9.0 10.3 11.9 15.4 16.6 16.6

Luxembourg

Aaa/STA

Intpaym/Revenue 0.5 0.8 1.0 1.0 1.2 1.6 1.7

Nominal GDP Growth 6.2 0.9 2.1 4.8 4.5 5.7 5.5

Budget Balance 5.0 2.9 -2.8 -5.0 -5.7 -6.4 -7.1

Interest Rate 5.3 5.3 5.5 4.9 5.6 6.2 6.8

Debt/GDP 27.3 25.5 27.3 33.4 37.7 42.0 46.9

New Zealand

Aaa/STA

Intpaym/Revenue 3.2 3.1 3.2 3.1 4.3 5.3 6.5


Budget Balance 0.0 -0.4 -2.9 -3.7 -2.7 -1.8 -0.9

Interest Rate 2.8 4.0 4.3 4.3 3.9 3.7 3.5

Debt/GDP 49.5 40.9 43.9 44.3 46.1 46.9 46.6

Switzerland

Aaa/STA

Intpaym/Revenue 4.1 5.3 5.9 6.1 5.5 5.3 5.1

Note: Interest rate refers to the effective interest rate on the countrys debt, not to the market yield. The cells shaded inlight green reflect a positive revision of Moodys estimate compared to the forecast published in the September AaaSovereign Monitor, the ones shaded in light red a negative revision.




Debt P rojections: Baseline Scenario

Average2004 to 2007 2008 2009 2010 2011 2012 2013


Budget Balance -2.9 -3.4 -8.2 -8.3 -7.8 -7.2 -6.7

Interest Rate 4.3 4.5 4.1 3.9 3.9 4.1 4.3Debt/GDP 64.7 68.1 76.1 82.5 87.8 91.8 94.9

France

Aaa/STA

Intpaym/Revenue 5.4 5.7 6.0 6.2 6.5 7.2 7.7


Budget Balance -2.2 0.0 -3.0 -5.0 -4.6 -3.3 -2.3

Interest Rate 4.4 4.3 3.9 3.9 3.9 4.0 4.1

Debt/GDP 66.5 65.9 73.1 76.7 79.1 80.3 80.3

Germany

Aaa/STA

Intpaym/Revenue 6.4 6.2 6.1 6.5 6.8 7.2 7.5


Budget Balance -3.0 -5.1 -12.1 -12.9 -11.3 -10.5 -9.2

Interest Rate 5.3 5.4 5.1 4.2 4.2 4.3 4.4

Debt/GDP 42.6 51.8 68.6 80.3 86.4 91.8 95.5

UK

Aaa/STA

Intpaym/Revenue 5.1 5.4 7.0 7.2 7.8 8.5 9.1


Budget Balance -2.3 -3.2 -10.0 -9.1 -7.3 -4.7 -4.7

Interest Rate 4.6 4.9 3.0 2.7 3.0 3.4 3.8

Debt/GDP 37.2 40.2 53.2 65.3 69.2 69.8 70.8

US FG

Aaa/STA

Intpaym/Revenue 8.9 10.0 8.4 8.7 11.3 13.0 14.5


Budget Balance -3.2 -5.9 -12.0 -10.3 -8.2 -5.0 -5.5

Interest Rate 3.3 3.4 2.9 2.6 2.9 3.3 3.6

Debt/GDP 62.2 71.1 86.7 99.0 102.2 101.2 101.4

US GG

Aaa/STA

Intpaym/Revenue 5.8 6.3 6 .7 7 .0 8.4 9.4 10.4


Budget Balance -2.2 -0.5 -4.4 -5.5 -5.2 -5.1 -4.9

Interest Rate 4.7 4.4 4.5 4.4 4.3 4.4 4.4

Debt/GDP 62.6 62.6 69.1 73.9 76.7 78.9 80.8

Austria

Aaa/STA

Intpaym/Revenue 5.9 5.2 6.1 6.4 6.6 6.8 7.1


Budget Balance 1.0 2.5 -2.2 -4.2 -4.3 -2.0 -0.8

Interest Rate 3.5 4.8 4.2 4.2 4.1 4.2 4.3

Debt/GDP 6.4 13.5 15.0 16.4 19.6 20.4 19.9

Luxembourg

Aaa/STA

Intpaym/Revenue 0.5 0.8 1.5 1.5 1.7 2.0 2.1


Budget Balance 5.0 2.9 -2.8 -5.0 -5.7 -6.4 -7.1

Interest Rate 5.3 5.3 5.5 4.9 5.6 6.2 6.8

Debt/GDP 27.3 25.5 27.3 33.4 37.7 42.0 46.9

New Zealand

Aaa/STA

Intpaym/Revenue 3.2 3.1 3.2 3.1 4.3 5.3 6.5Nominal GDP Growth 4.5 4.0 -0.9 1.1 2.1 2.3 2.5

Budget Balance 0.0 -0.4 -2.9 -3.7 -2.7 -1.8 -0.9

Interest Rate 2.8 4.0 4.3 4.3 3.9 3.7 3.5

Debt/GDP 49.5 40.9 43.9 44.3 46.1 46.9 46.6

Switzerland

Aaa/STA

Intpaym/Revenue 4.1 5.3 5.9 6.1 5.5 5.3 5.1

Note: Interest rate refers to the effective interest rate on the countrys debt, not to the market yield. The cells shaded inlight green reflect a positive revision of Moodys estimate compared to the forecast published in the September AaaSovereign Monitor, the ones shaded in light red a negative revision.




Debt Projections: Adverse Scenario

Average2004 to 2007 2008 2009 2010 2011 2012 2013


Budget Balance -2.9 -3.4 -8.2 -9.3 -9.3 -9.3 -9.5

Interest Rate 4.3 4.5 4.1 3.9 4.4 5.2 5.9

Debt/GDP 64.7 68.1 76.1 83.9 91.1 97.5 103.6

France

Aaa/STA

Intpaym/Revenue 5.4 5.7 6.0 6.2 7.5 9.5 11.5


Budget Balance -2.2 0.0 -3.0 -6.0 -6.0 -5.1 -4.7

Interest Rate 4.4 4.3 3.9 3.9 4.3 4.9 5.5

Debt/GDP 66.5 65.9 73.1 78.1 82.5 86.2 89.3

Germany

Aaa/STA

Intpaym/Revenue 6.4 6.2 6.3 6.7 7.8 9.3 10.7


Budget Balance -3.0 -5.1 -12.1 -13.9 -12.7 -12.6 -12.0

Interest Rate 5.3 5.4 5.1 4.2 4.7 5.4 6.0

Debt/GDP 42.6 51.8 68.6 81.6 90.0 98.2 105.3

UK

Aaa/STA

Intpaym/Revenue 5.1 5.4 7.0 7.2 9.0 11.3 13.5


Budget Balance -2.3 -3.2 -10.0 -10.1 -8.6 -6.5 -7.0

Interest Rate 4.6 4.9 3.0 2.7 3.5 4.4 5.2

Debt/GDP 37.2 40.2 53.2 66.5 72.2 74.9 78.3

US FG

Aaa/STA

Intpaym/Revenue 8.9 10.0 8.4 8.8 13.6 17.7 21.8


Budget Balance -3.2 -5.9 -12.0 -11.3 -9.6 -6.9 -8.0

Interest Rate 3.3 3.4 2.9 2.6 3.3 4.0 4.8

Debt/GDP 62.2 71.1 86.7 100.4 105.6 106.9 109.9

US GG

Aaa/STA

Intpaym/Revenue 5.8 6.3 6.7 7.0 9.7 12.1 14.8


Budget Balance -2.2 -0.5 -4.4 -6.5 -6.6 -7.0 -7.3Interest Rate 4.7 4.4 4.5 4.4 4.8 5.3 5.8

Debt/GDP 62.6 62.6 69.1 75.2 79.9 84.4 88.9

Austria

Aaa/STA

Intpaym/Revenue 5.9 5.2 6.1 6.4 7.4 8.7 10.0


Budget Balance 1.0 2.5 -2.2 -5.2 -5.4 -3.4 -2.4

Interest Rate 3.5 4.8 4.2 4.2 4.6 5.4 6.0

Debt/GDP 6.4 13.5 15.0 17.5 22.2 24.7 26.0

Luxembourg

Aaa/STA

Intpaym/Revenue 0.5 0.8 1.5 1.6 2.0 3.0 3.6


Budget Balance 5.0 2.9 -2.8 -6.0 -7.0 -7.9 -9.0

Interest Rate 5.3 5.3 5.5 4.9 6.2 7.1 8.2

Debt/GDP27.3 25.5 27.3 34.5 40.1 46.1 52.8

New Zealand

Aaa/STA

Intpaym/Revenue 3.2 3.1 3.2 3.1 4.9 6.6 8.7


Budget Balance 0.0 -0.4 -2.9 -4.7 -3.9 -3.3 -2.7

Interest Rate 2.8 4.0 4.3 4.3 4.2 4.5 4.7

Debt/GDP 49.5 40.9 43.9 45.5 48.7 51.1 52.8

Switzerland

Aaa/STA

Intpaym/Revenue 4.1 5.3 5.9 6.1 6.2 7.0 7.6

Note: Interest rate refers to the effective interest rate on the countrys debt, not to the market yield. The cells shaded in lightgreen reflect a positive revision of Moodys estimate compared to the forecast published in the September Aaa SovereignMonitor, the ones shaded in light red a negative revision.




Moodys Related Research

Special Comments

France's Grand Emprunt: A Short-Term Cost for an Uncertain Long-Term Gain, November 2009 (121223)

Why Aaa Sovereigns Get Downgraded, September 2009 (119194)

Central Bank Exit Strategies May Gradually Exert Pressure on European Government Finance-ability,

November 2009 (121480)

Anchors in the Storm: Aaa Governments and Bank Bail-Outs, March 2008 (108164)

What Does It Mean To Be A Triple-A Sovereign?, May 2008 (109129)

When macroeconomic tensions result in rating changes: how vulnerable are EMEA Sovereigns?, May

2008 (109182)

Sovereign Defaults and Interference: Perspectives on Government Risks, July 2008 (110114)

The Unshaken Foundations of the U.S. Government's Aaa Rating, September 2008 (111526)

Banking Crisis: European Governments Take Calculated Risks With Public Finances - But No RatingImpact Except for Iceland, October 2008 (111874)

Rating Sovereigns During a Global "Sudden Stop" in International Funding, November 2008 (112231)

Moody's Interprets Uncovered Aaa Government Bond Auctions, January 2009 (114012)

Dimensioning US Government Debt, February 2009 (114559)

How Far Can Aaa Governments Stretch Their Balance Sheets?, February 2009 (114682)

Not All Public Debt is the Same: Navigating the Public Accounts Maze, February 2009 (114612)

Rating Sovereign Risk Through a Once-a-Century Crisis, June 2009 (117727)

Are Sovereigns on the Road to Recovery?, July 2009 (119222)

Issuer Comments

Moody's: Germany Well Placed to Adjust to Challenges Posed by the Global Crisis, 10 September 2009

New Zealand Budget Raises Debt, But Aaa Rating Outlook Remains Stable, June 2009 (117684)

U.S. Treasury's Intention to Lengthen Debt Maturity Reduces Vulnerability to Interest Rate Shocks,

November 2009 (120978)

U.S. Statutory Debt Limit to be Raised; Longer-Term Fiscal Strategy the Real Question, September 2009

(120298)

Germany Faces Delicate Economic Rebalancing Act, May 2009 (117381)

Rating Methodology

Sovereign Bond Ratings, September 2008 (109490)

To access any of these reports, click on the entry above. Note that these references are current as of the date of publication

of this report and that more recent reports may be available. All research may not be available to all clients.
http://v3.moodys.com/viewresearchdoc.aspx?docid=PBC_121223http://www.moodys.com/cust/getdocumentByNotesDocId.asp?criteria=PBC_119194http://www.moodys.com/cust/getdocumentByNotesDocId.asp?criteria=PBC_121480http://www.moodys.com/cust/getdocumentByNotesDocId.asp?criteria=PBC_121480http://www.moodys.com/cust/getdocumentByNotesDocId.asp?criteria=PBC_108164http://www.moodys.com/cust/getdocumentByNotesDocId.asp?criteria=PBC_109129http://www.moodys.com/cust/getdocumentByNotesDocId.asp?criteria=PBC_109182http://www.moodys.com/cust/getdocumentByNotesDocId.asp?criteria=PBC_109182http://www.moodys.com/cust/getdocumentByNotesDocId.asp?criteria=PBC_110114http://www.moodys.com/cust/getdocumentByNotesDocId.asp?criteria=PBC_111526http://www.moodys.com/cust/getdocumentByNotesDocId.asp?criteria=PBC_111874http://www.moodys.com/cust/getdocumentByNotesDocId.asp?criteria=PBC_111874http://www.moodys.com/cust/getdocumentByNotesDocId.asp?criteria=PBC_112231http://www.moodys.com/cust/getdocumentByNotesDocId.asp?criteria=PBC_114012http://www.moodys.com/cust/getdocumentByNotesDocId.asp?criteria=PBC_114559http://www.moodys.com/cust/getdocumentByNotesDocId.asp?criteria=PBC_114682http://www.moodys.com/cust/getdocumentByNotesDocId.asp?criteria=PBC_114612http://www.moodys.com/cust/getdocumentByNotesDocId.asp?criteria=PBC_117727http://www.moodys.com/cust/getdocumentByNotesDocId.asp?criteria=PBC_119222http://v3.moodys.com/viewresearchdoc.aspx?docid=PR_186450http://www.moodys.com/cust/getdocumentByNotesDocId.asp?criteria=PBC_117684http://www.moodys.com/cust/getdocumentByNotesDocId.asp?criteria=PBC_120978http://www.moodys.com/cust/getdocumentByNotesDocId.asp?criteria=PBC_120978http://www.moodys.com/cust/getdocumentByNotesDocId.asp?criteria=PBC_120298http://www.moodys.com/cust/getdocumentByNotesDocId.asp?criteria=PBC_120298http://www.moodys.com/cust/getdocumentByNotesDocId.asp?criteria=PBC_117381http://www.moodys.com/cust/getdocumentByNotesDocId.asp?criteria=PBC_109490http://www.moodys.com/cust/getdocumentByNotesDocId.asp?criteria=PBC_109490http://www.moodys.com/cust/getdocumentByNotesDocId.asp?criteria=PBC_117381http://www.moodys.com/cust/getdocumentByNotesDocId.asp?criteria=PBC_120298http://www.moodys.com/cust/getdocumentByNotesDocId.asp?criteria=PBC_120298http://www.moodys.com/cust/getdocumentByNotesDocId.asp?criteria=PBC_120978http://www.moodys.com/cust/getdocumentByNotesDocId.asp?criteria=PBC_120978http://www.moodys.com/cust/getdocumentByNotesDocId.asp?criteria=PBC_117684http://v3.moodys.com/viewresearchdoc.aspx?docid=PR_186450http://www.moodys.com/cust/getdocumentByNotesDocId.asp?criteria=PBC_119222http://www.moodys.com/cust/getdocumentByNotesDocId.asp?criteria=PBC_117727http://www.moodys.com/cust/getdocumentByNotesDocId.asp?criteria=PBC_114612http://www.moodys.com/cust/getdocumentByNotesDocId.asp?criteria=PBC_114682http://www.moodys.com/cust/getdocumentByNotesDocId.asp?criteria=PBC_114559http://www.moodys.com/cust/getdocumentByNotesDocId.asp?criteria=PBC_114012http://www.moodys.com/cust/getdocumentByNotesDocId.asp?criteria=PBC_112231http://www.moodys.com/cust/getdocumentByNotesDocId.asp?criteria=PBC_111874http://www.moodys.com/cust/getdocumentByNotesDocId.asp?criteria=PBC_111874http://www.moodys.com/cust/getdocumentByNotesDocId.asp?criteria=PBC_111526http://www.moodys.com/cust/getdocumentByNotesDocId.asp?criteria=PBC_110114http://www.moodys.com/cust/getdocumentByNotesDocId.asp?criteria=PBC_109182http://www.moodys.com/cust/getdocumentByNotesDocId.asp?criteria=PBC_109182http://www.moodys.com/cust/getdocumentByNotesDocId.asp?criteria=PBC_109129http://www.moodys.com/cust/getdocumentByNotesDocId.asp?criteria=PBC_108164http://www.moodys.com/cust/getdocumentByNotesDocId.asp?criteria=PBC_121480http://www.moodys.com/cust/getdocumentByNotesDocId.asp?criteria=PBC_121480http://www.moodys.com/cust/getdocumentByNotesDocId.asp?criteria=PBC_119194http://v3.moodys.com/viewresearchdoc.aspx?docid=PBC_121223


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