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How Much Debt is too much Debt?

Earlier this morning, credit rating service Standard & Poor’s (“S&P”) revised its credit outlook on Japan to “negative” from “stable.” This could seemingly pave the road to a future downgrade to Japan’s current AA long-term rating. As part of rationale behind the revision to their credit outlook for the country, S&P cited concerns over amount of Japanese government debt outstanding. Japan’s government debt is already among the highest in the world and S&P thinks the debt burden might peak at a level as high as 115% of their Gross Domestic Product (“GDP”) over the next few years.

After reviewing this report, our minds, at Hennion & Walsh, immediately turned to the United States to see if a similar rating action could be possible for the U.S. given the size of debt outstanding vs. our own GDP.  While the projections are not as alarming as those of Japan, they still paint a concerning picture.  According to the Office of Management and Budget, the following table provides the recent and projected Gross Federal Debt to GDP ratios.  Please recognize that these figures contain projections and are as of a point in time.

Moody’s and Fitch, two other credit rating services, went on further recently to suggest that Japan’s debt burden was “relatively moderate” and expressed confidence that “the market will finance them without putting big upward pressure on yields.”  We believe this to be the case for the U.S. as well although we may very well reach at point where the overall debt burden in the United States is too high for certain foreign investors and credit rating services.

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