WASHINGTON (MNI) – The following is the text of the report by
Moody’s Tuesday, in which it says structural fundamentals, political
stability, and still favorable post-crisis economic prospects support
the stable outlook for the Aaa ratings of the United States:

Credit Strengths

Credit strengths for the United States are:

— The world’s largest economy, with major shares of global trade,
international finance, and international corporate activity

— Global role of the currency, extremely small foreign-currency
liabilities, and continued inflow of financial capital and direct
investment

— Innovative and flexible economy

Credit Challenges

Credit challenges for the United States are:

— The effects of the credit crisis and recession on government
debt and fiscal flexibility

–Effects of rising government debt on investor confidence,
particularly foreign, and on ease of future government access to finance

— Social Security and Medicare programs that face serious
long-term financing problems

Rating Rationale

Moody’s Aaa government bond rating is based on the very high degree
of economic and institutional strength, a high degree of government
financial strength, and very low susceptibility to event risk. Although
government financial strength is weakening as a result of interventions
to support the financial system and the economy, other factors
supporting the Aaa rating remain intact.

The US is the world’s largest economy and is still the center of
global trade and finance, supported by flexible markets and open trade
and financial regimes. Over time, American economic competitiveness has
been reinforced by fairly rapid productivity growth, a high degree of
technological innovation, and generally sound public finances. Recently,
prospects for some of these factors have deteriorated, most notably
federal government finances.

These finances have been substantially worsened by the credit
crisis, recession, and government spending to address these shocks. The
ratios of general government debt to GDP and to revenue are
deteriorating sharply, and after the crisis they are likely to be higher
than the ratios of other Aaa-rated countries. The federal government
debt ratios, which Moody’s considers relevant to the rating givengiven
the US’s relatively decentralized fiscal structure, are rising steeply
and will continue that trend for several years to come.

However, a substantial portion of the rise results from asset
purchases (equity investments and the purchase of securities), meaning
that the net worth of the federal government is affected to a lesser
degree.

For a number of years, the United States has run sizable current
account deficits. Although these deficits are likely to decline in the
coming few years, they still indicate dependence on foreign savings,
with the affordability of government debt being potentially affected if
confidence were to be damaged.

Rating Outlook

Structural fundamentals, political stability, and still favorable
post-crisis economic prospects support the stable outlook for the Aaa
ratings of the United States.

The government’s ability to deal with the aftermath of the credit
crisis and begin to repair its balance sheet will also be a rating
consideration.

What Could Change the Rating – Down

If the upward trend in debt ratios and interest costs continues and
measures to stabilize them are not taken, the rating could come under
downward pressure.

Recent Developments

The economy has recorded three consecutive quarters of positive
real GDP growth, although the annualized rate of increase fell to 3.2%
during the first quarter. An important factor in the outlook is the
household saving rate, which, after peaking at 5.4% in the second
quarter of last year, has declined to 3.1% in the latest quarter. Thus,
consumption grew at a relatively rapid pace, helped by a return to
positive employment growth during the first four months of the year.
While residential construction declined in the first quarter, the number
of housing starts rose, indicating that this sector may also contribute
to GDP growth in future quarters.

The budget deficit for the current fiscal year is tracking to be
about the same in nominal terms as last year, although as a percentage
of GDP it will decline a bit. Nonetheless, because of the size of the
deficit (nearly $900 billion for the first seven months), it is adding
to the ratios of debt/GDP and debt/revenue. The latter has more than
doubled over the past three years, reaching well over 400%, indicating
potential stress on federal government finances in the future. Moody’s
expects that this ratio will begin to decline after the current fiscal
year, but it will remain high.

** Market News International Washington Bureau: 202-371-2121 **

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