INCRA’s US Sovereign-Debt Rating

Thursday, 18 April 2013, 2:00pm – 2:30pm


  • Michael Mandelbaum, Christian A. Herter Professor and Director, American Foreign Policy Program, The Johns Hopkins University School of Advanced International Studies (SAIS)
  • Vincent Truglia, International Economist and Publisher, and former Head, Sovereign Risk Unit, Moody’s Investors Service


  • Annette Heuser, Executive Director, Bertelsmann Foundation

INCRA's US Debt Rating Explained

US sovereign debt received a AA+ rating with a stable outlook from a committee of experts brought together by the Bertelsmann Foundation, in another demonstration of the need for a new International Non-Profit Credit Rating Agency (INCRA), said Bertelsmann Foundation Executive Director Annette Heuser at the 5th annual Bertelsmann Foundation-Financial Times conference in Washington, DC.

"You can't really prove that your model is working without rating the 800-pound gorilla in the room, which is the United States," according to Heuser. She went on to explain that the committee combined political scientists, economists and analysts in a simulation of the composition of a traditional rating committee.

The US fell short of a triple-A rating because of its burgeoning fiscal deficit and the lack of political consensus needed to restore long-term budget balance, panelists said. They explained the “ratings radar” that INCRA produces, with indentations in the target around public-sector fiscal policy and social cohesion.

The US still has the world's largest economy, deep and liquid capital markets, a strong manufacturing sector, a culture of innovation and the best system of higher education, said Michael Mandelbaum, Christian A. Herter professor and director of the American Foreign Policy Program at the Johns Hopkins University School of Advanced International Studies (SAIS).

"The United States finds itself in enviable economic circumstances, but there is an Achilles heel. It is American politics," Mandelbaum noted. "It is the state of American politics that stands between the US and a triple-A rating."

The brinksmanship displayed in recent years over the US debt ceiling and a possible default on sovereign debt alarms markets and highlights the unusual degree of conflict in current US politics.

"The fact that [default] is even conceivable is cause for concern," he said. The US debt to revenue ratio is higher than its peers and its debt to gross domestic product ratio is far higher than historical norms.

Although the US spends twice what any other country spends on medical costs, its near-term debt trajectory is actually downward, said Vincent Truglia, international economist and publisher of and former head of the Sovereign Risk Unit for Moody’s Investors Service. In 2018 the debt load would start to increase if nothing else changes, but the committee assumes that entitlement or healthcare reforms will occur before then.

US growth may be slower than in the end of the 1990s, but it's faster than the five years before the recent recession. The healthy prospects in the immediate future account for the rating's stable outlook.

"Macroeconomically, except for the long-term problem with health care costs affecting the budget, the US is in good shape," Truglia said.

INCRA’s key objective is to improve the transparency of sovereign ratings, eliminate conflicts of interest, and cure the major deficiencies when it comes to qualitative measures of a country's ability and willingness to service its debt, Heuser said. The project has already rated five countries: Brazil, France, Germany, Italy and Japan.

Longer term, the US faces the substantial challenge of soaring health care costs and the retirement of the Baby Boom generation. "Unless that problem is seriously addressed, the fiscal future of the United States will not be a happy one," Mandelbaum warned.

The growing homogenization of both political parties has entrenched their positions and made compromise harder, as has the rise of divisive social issues such as gay rights and abortion, he said. However, the gridlock has thus far produced declining deficits and the US has avoided the debt problems of Europe, Truglia noted.

Panelists expressed hope that the system will become more functional and that a long-term fiscal solution will be possible. "The good news is nobody ever got rich betting against the United States of America," Mandelbaum said. "The bad news is there's a first time for everything."