Modys Sovereign

December 2009

Table of Contents: Global Economic Recovery, but Fiscal Crisis Remains 2 1. Where Is the Aaa-Aa Demarcation Zone? 4 2. Mapping the Near Future – Our Scenarios6 3. The “Vulnerable”, the “Resilient” and the “Resistant”: A Reminder 7 4. Updates on the Four Largest Aaa Countries 8 France 8 Germany 10 United Kingdom 12 United States 14 5. Updates on Selected Other Aaa Countries 17 6. Special Focus: How Do We Measure Debt Financeability? 21 Appendix: Debt Projections 25 Moody’s Related Research 28

Analyst Contacts: London

44.20.7772.5454

Pierre Cailleteau Arnaud Marès

Frankfurt

49.69.7073.0700

Dietmar Hornung Alexander Kockerbeck

New York

1.212.553.1653

Steven Hess Analytical Coordinator for this issue

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 Moody’s Aaa Sovereign Monitor. 1.

Some countries will struggle to deal with the very large fiscal imbalances and accumulated 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 under 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.

Moody’s Aaa Sovereign Monitor

Quarterly Monitor

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 Eurozone’s rate of increase was not impressive. However, the UK economy continued to decline. Figures are not yet available for all other countries, but it appears very likely that Australia’s 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 longlasting. Moody’s considers government financial strength – i.e. the future trajectory of the government’s 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, Moody’s has downgraded only one

Debt trajectories 2009-2013 - Baseline scenarios Countries covered by the Dec. 09 Aaa Sovereign Monitor 0

20

40

60

80

100

120

0

Interest payments to GG revenue (%)

Debt to GDP (%) Luxembourg 2

4 Switzerland New Zealand 6

Germany Austria France

8 UK USA (GG) 10 Debt Reversibility Band 12

2

Aaa Space

December 2009 „ Quarterly Monitor „ Aaa-Sovereign Monitor

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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”. Moody’s 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 Zealand’s banks are mainly owned by strong foreign banks, but the size of the country’s (and the banks’) external liabilities have also raised questions, now considerably alleviated, about the government’s contingent liability. It is worth noting that Moody’s 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 Switzerland’s 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 Moody’s uses in analyzing debt 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.

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December 2009 „ Quarterly Monitor „ Aaa-Sovereign Monitor

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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. Moody’s approach is based on the following elements:

4

„

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 country’s 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 imminent default 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 inconvenience rather 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 nonpunitive 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 government’s 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.

December 2009 „ Quarterly Monitor „ Aaa-Sovereign Monitor

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

5

December 2009 „ Quarterly Monitor „ Aaa-Sovereign Monitor

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2. Mapping the Near Future – Our Scenarios Moody’s debt scenarios combine two types of analysis: „ „

a macro-economic scenario based on different economic recovery prospects 1 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 and recovery 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

Same as Baseline

Financial stability operations are in the end debt-neutral, i.e. the added debt in gross terms is fully offset by a full recovery of the assets acquired.

Baseline Scenario (Blue line with dots)

Central scenario: “hook-shaped” economic rebound and moderate fiscal adjustment

Financial stability operations add to net debt, with recovery rates close to historical experience (55% on fiscal measures). Recovery time of 5 years.

Adverse Scenario (Orange lines)

Adverse economic scenario: lower growth (by 0.5% each year), lower fiscal adjustment (primary balance lower by 1% each year), higher interest rates*

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

Benign Scenario (Green line with triangles on the debt graphs)

1 2

*

6

See “On the Hook – Update on Moody’s Global Macroeconomic Risk Scenarios 2009-2010”, Moody’s Global Financial Risk Perspectives, May 2009. Moody’s government liability map is explained in Moody’s Special Comment entitled “Not All Public Debt is the Same: Navigating the Public Accounts Maze”, 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 points (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 baseline yield. The assumed increases refer to the market yield, not to the effective interest rate on the country’s debt. December 2009 „ Quarterly Monitor „ Aaa-Sovereign Monitor

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3. The “Vulnerable”, the “Resilient” and the “Resistant”: A Reminder These three categories reflect Moody’s 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

RESILIENT

These are Aaa countries that started from a comparatively robust position and/or are not undergoing a lasting challenge to their economic model or facing a massive risk of crystallization of contingent liabilities. While resistant, they are clearly not immune. Debt may increase, but not to the extent of stretching affordability beyond a level consistent with a Aaa status. The typical “resistant” Aaa is Canada. Germany and France are also resistant, but clearly more weakened by the crisis.

In the debt graphs, these are countries that remain clear of the ”debt reversibility” zone in the baseline scenario – and well below the top of that zone in the unlikely adverse case.

These are the Aaa countries whose public finances are deteriorating considerably and may therefore test the Aaa boundaries, but which display, in our opinion, an adequate reaction capacity to rise to the challenge and rebound. These countries are rated Aaa more because of their balance sheet flexibility than because of their current or projected debt levels over the next few years. The typical “resilient” Aaa is the USA.

In the debt graphs, we see a considerable deterioration of debt metrics, which, in the adverse scenario, may even exceed the top of the “debt reversibility” zone. However, the low probability we assign to the adverse scenario, combined with the ample adjustment capacity, justifies the characterization as “resilient”.

VULNERABLE These are the Aaa countries whose public finances face even greater challenges and seem to be stretched beyond the point of ‘no return’ to the Aaa category. Time is working against such countries and they are less likely to retain their Aaa rating – however, they can nonetheless do so if they display a 'back-to-the wall' adjustment capacity that exceeds expectations. We are therefore monitoring the near-term prospects in terms of debt reversibility.

The typical “vulnerable” Aaa was Ireland (prior to its downgrade in July 2009). In terms of debt graphs, “vulnerable” Aaa countries have weaker debt metrics than "resistant" Aaas and weaker debt reversibility capacity than "resilient" Aaas.

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December 2009 „ Quarterly Monitor „ Aaa-Sovereign Monitor

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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%. France’s 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 increase marginally to 8½% in 2010, when an improvement in the central government’s 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 High Taxation Levels As the government already levies a substantial share of the country’s resources, the ability to increase taxation further without depressing economic potential is questionable. Indeed, the government’s 2010 budget does not include 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 France’s 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 Sarkozy’s policy of public investments (known as the grand emprunt) may eventually contribute to enhancing the economy’s potential, but Moody’s considers its size (1¾% of GDP) too limited and its net effect too uncertain for it to improve the reversibility of France’s debt metrics. 3 Without such an improvement in debt reversibility, the ongoing deterioration of government debt affordability will slowly erode the country’s (still significant) “distance-to-downgrade”.

3

8

See Moody’s Special Comment “France’s Grand Emprunt: A Short-Term Cost for an Uncertain Long-Term Gain”, November 2009. December 2009 „ Quarterly Monitor „ Aaa-Sovereign Monitor

Moody’s Aaa Sovereign Monitor

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France: Moderate erosion in “distance to downgrade” Distance to Downgrade - Main Scenarios 60

70

80

90

100

Interest Rate Sensitivity

110

In te re s t P a y m e n t / R e v e n u e (% )

4

60

70

5

Debt/GDP (%)

2008

6

2009

100

7

2008

2009

2013

2011

8

9

F

2010

7

2012 2011

8

2007

6

2011

Debt/GDP (%)

Aaa Space

5

2010

2007

B

9 2012

10

10

11

2012 S

Reversibility band

11

Reversibility band 2013

12

12

13

13

2013 VS Aa Space

Adverse scenario

Benign scenario

Aa Space

Baseline scenario

14

Fiscal Adjustment Sensitivity 60

70

80

4 5 6

Nominal Growth Sensitivity

90

100

60

2008 2007

2009

6

2011 VF

B

100

2009

2007

2010 2011

7

2012 F

90

Debt/GDP (%) 2008

2010

8

80

Aaa Space 5

7

2013

S

VS

9 10 11

70

4

Debt/GDP (%)

Aaa Space

In te re s t P a y m e n t / R e v e n u e (% )

90

4 Aaa Space

14

VF

8

2012 F

B

9 10

Reversibility band

11

12

Reversibility band

12

13

13 Aa Space

Aa Space 14

14 Nominal Growth Sensitivity

VF F S VS

Fiscal Adjustment Sensitivity

Interest Rate Sensitivity

2010

2011 onwards

2010

2011 onwards

2010

2011 onwards

+1%p

+2%p

-1%p

-2%p

-

-

Favorable

+0.5%p

+1%p

-0.5%p

-1%p

-50bps

-100bps

Severe

-0.5%p

-1%p

+0.5%p

+1%p

+100bps

+200bps

-1%p

-2%p

+1%p

+2%p

+150bps

+300bps

Uplift/Discount applied

9

80

Very Favorable

Very Severe

December 2009 „ Quarterly Monitor „ Aaa-Sovereign Monitor

2013 S

VS

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Germany: A Resistant Aaa Relatively well placed to absorb the fiscal and economic shock, but unemployment and banks may weigh on the recovery Germany has been particularly hard-hit by the effects of the global recession because the shock has come from 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. Germany’s 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 Germany’s 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 Germany’s growth outlook. Private consumption and German banks’ financial strength remain potential constraints for a stronger economic recovery. The expected rise in unemployment 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.

Germany’s 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 is projected 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 Länder will be forced to present balanced structural budgets as of 2020. These rules require fiscal consolidation from 2011 onwards. The government’s 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 government’s capacity and willingness to better control expenditure will be further tested.

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December 2009 „ Quarterly Monitor „ Aaa-Sovereign Monitor

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Germany: Still well within Aaa space in all but severe scenarios Distance to Downgrade - Main Scenarios 60

65

70

75

80

85

Interest Rate Sensitivity

90

95

65

Debt/GDP (%)

Aaa Space

5

2009

2008

6

2007

7

2008

8

2009

85

90

95

90

95

F

2010 B

2011

8 9

2012

S

10 2013

11 Reversibility band

12

VS

11

2013

Reversibility band

12 13

13 Adverse scenario

Benign scenario

Aa Space

Baseline scenario

14

14

Fiscal Adjustment Sensitivity 60

65

70

75

4

80

85

Nominal Growth Sensitivity 90

95

60

65

70

4

Debt/GDP (%)

Aaa Space

In te re s t P a y m e n t / R e v e n u e (% )

2009

2007

7

2012

Aa Space

75

80

85

Debt/GDP (%)

Aaa Space

5

5 2008

2008

2009

2007

7

VF

F

8

2009

6

2010

7

2012 B

2010

2007

2011 2013 S

VF

F

8

VS

9

9

10

10

11

2011 2012 B

2013

S

VS

11 Reversibility band

12

13

Reversibility band

13 Aa Space

14

14 Nominal Growth Sensitivity Uplift/Discount applied

VF F S VS

11

80

Debt/GDP (%)

2008

6

2010 2010 2010 2011 2011 2012 2012 2013 2011 2013

10

12

75

Aaa Space

5

9

6

70

4

4

In te re s t P a y m e n t / R e v e n u e (% )

60

Very Favorable

2010

Aa Space Fiscal Adjustment Sensitivity

2011 onwards

2010

2011 onwards

Interest Rate Sensitivity 2010

2011 onwards

+1%p

+2%p

-1%p

-2%p

-

-

Favorable

+0.5%p

+1%p

-0.5%p

-1%p

-50bps

-100bps

Severe

-0.5%p

-1%p

+0.5%p

+1%p

+100bps

+200bps

-1%p

-2%p

+1%p

+2%p

+150bps

+300bps

Very Severe

December 2009 „ Quarterly Monitor „ Aaa-Sovereign Monitor

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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. Net bank 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 UK’s 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 the short 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 mediumto 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 improvement in debt affordability over time. Demand for gilts has also been supported by the Bank of England’s 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 suggests genuine capacity to repair the damage Moody’s 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 UK’s 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 assumed capacity 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.

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December 2009 „ Quarterly Monitor „ Aaa-Sovereign Monitor

Moody’s Aaa Sovereign Monitor

Quarterly Monitor

The UK: Fiscal adjustment effort to test resiliency Distance to Downgrade - Main Scenarios 40

50

60

70

80

90

100

Interest Rate Sensitivity

In te re s t P a y m e n t / R e v e n u e (% )

40

110

50

Debt/GDP (%)

Aaa Space

80

90

100

110

4 2007

2010

6

2010 2009

8

2009

10

6

2009

2010 2011

2011 2012 2012 2013 2013 2011

2010 F

8

B

2011

10

2012

Reversibility band

12

2008

2007

2008

Reversibility band

12

2012 S

2013

14

14 Adverse scenario

Benign scenario

2013

16

Fiscal Adjustment Sensitivity 40

50

60

70

2 4 2007

80

90

Nominal Growth Sensitivity

100

110

40

4

2009

60

2007

80

2009

F

10

B

2012

2013 S

VS

12

14

2013

VF F B

10

Reversibility band

S

Reversibility band

14 Aa Space

Aa Space

16

16 Nominal Growth Sensitivity

VF F S VS

Fiscal Adjustment Sensitivity

Interest Rate Sensitivity

2010

2011 onwards

2010

2011 onwards

2010

2011 onwards

+1%p

+2%p

-1%p

-2%p

-

-

Favorable

+0.5%p

+1%p

-0.5%p

-1%p

-50bps

-100bps

Severe

-0.5%p

-1%p

+0.5%p

+1%p

+100bps

+200bps

-1%p

-2%p

+1%p

+2%p

+150bps

+300bps

Uplift/Discount applied Very Favorable

Very Severe

December 2009 „ Quarterly Monitor „ Aaa-Sovereign Monitor

110

2011 8

2012 VF

100

2010

2011 8

90

2008

6

2010

70

Debt/GDP (%)

Aaa Space

2008

6

50

2

Debt/GDP (%)

Aaa Space

12

VS

Aa Space

Baseline scenario

16

In te re s t P a y m e n t / R e v e n u e (% )

70

Debt/GDP (%)

Aaa Space

4

Aa Space

13

60

2

2

VS

Moody’s Aaa Sovereign Monitor

Quarterly Monitor

United States: A Resilient 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 government’s 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, Moody’s 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 debt to 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 Moody’s 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 Treasury’s 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 government’s interest payments could come closer to those in the adverse scenario.

14

December 2009 „ Quarterly Monitor „ Aaa-Sovereign Monitor

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Quarterly Monitor

USA – General Government Assessing debt reversibility will become important in coming years Distance to Downgrade – Main Scenarios 70 80 90 100 110

60

70

Debt/GDP (%)

Aaa Space

6

6 2007

2007

2010

2008

2009

2010 2011

8 10

2009 F

2011

2011

10

2013

12

2010

2008

8

2012

B 2012

Reversibility band

12

Reversibility band 2012

14

14

S

2013

2013

16

16 Aa Space

Adverse scenario

Benign scenario

VS

Aa Space

Baseline scenario

18

Fiscal Adjustment Sensitivity 60

70

80

4

90

100

110

120

70

80

90

100

6 2007

2009

8

110

Debt/GDP (%)

Aaa Space 2010

2008

60 4

6 2007

Nominal Growth Sensitivity

Debt/GDP (%)

Aaa Space

In te re s t P a y m e n t / R e v e n u e (% )

120

Debt/GDP (%)

Aaa Space

18

2010

2008

2009

8

2011

2011

2012 10 12

VF

F

B

S

Reversibility band

2013 VS

12

14

14

16

16 Aa Space 18 Nominal Growth Sensitivity

VF

F

B

Reversibility band

2013 S

VS

Aa Space

Fiscal Adjustment Sensitivity

Interest Rate Sensitivity

2010

2011 onwards

2010

2011 onwards

2010

2011 onwards

+1%p

+2%p

-1%p

-2%p

-

-

Favorable

+0.5%p

+1%p

-0.5%p

-1%p

-50bps

-100bps

Severe

-0.5%p

-1%p

+0.5%p

+1%p

+100bps

+200bps

-1%p

-2%p

+1%p

+2%p

+150bps

+300bps

Uplift/Discount applied

VF F S VS

2012

10

18

15

110

4

4

In te re s t P a y m e n t / R e v e n u e (% )

60

120

Interest Rate Sensitivity 80 90 100

Very Favorable

Very Severe

December 2009 „ Quarterly Monitor „ Aaa-Sovereign Monitor

120

Moody’s Aaa Sovereign Monitor

Quarterly Monitor

USA – Federal Government Interest costs and interest-rate sensitivity are rising Distance to Downgrade – Main Scenarios 35

45

55

65

Interest Rate Sensitivity

75

45

Debt/GDP (%)

6 2009

8

2007 2008

2010

2011

2008

F

2011

B

16

2012

18

18 Historical High - Early 1990's

20 22 24

S

22 2013 VS

24

Aa Space

Adverse scenario

Benign scenario

2012

Historical High - Early 1990's

20 2013

Aa Space

Baseline scenario

26

Fiscal Adjustment Sensitivity 35

In te re s t P a y m e n t / R e v e n u e (% )

2010

14

2013

26

45

55

Aaa Space

65

Nominal Growth Sensitivity 75

85

35 4

Debt/GDP (%)

6

45

55

Aaa Space

65

75

85

Debt/GDP (%)

6 2009

2010

2007

8 10

2008

2011

12 VF

14 16

2009

2010

2007

2011

2008

12

2012

2012 F

14 B S

2013 VS

18

VF F B

16

S VS

18 Historical High - Early 1990's

Historical High - Early 1990's

20

20

22

22

24

24 Aa Space

26

26 Nominal Growth Sensitivity

VF F S VS

Aa Space

Fiscal Adjustment Sensitivity

Interest Rate Sensitivity

2010

2011 onwards

2010

2011 onwards

2010

2011 onwards

+1%p

+2%p

-1%p

-2%p

-

-

Favorable

+0.5%p

+1%p

-0.5%p

-1%p

-50bps

-100bps

Severe

-0.5%p

-1%p

+0.5%p

+1%p

+100bps

+200bps

-1%p

-2%p

+1%p

+2%p

+150bps

+300bps

Uplift/Discount applied

16

85

Debt/GDP (%)

2007

12

16

10

75

10

2012

14

8

65

2009

8

2010 2011

12

Aaa Space

6

2010 2009

10

4

55

4 Aaa Space

In te re s t P a y m e n t / R e v e n u e (% )

35

85

4

Very Favorable

Very Severe

December 2009 „ Quarterly Monitor „ Aaa-Sovereign Monitor

2013

Moody’s Aaa Sovereign Monitor

Quarterly Monitor

5. Updates on Selected Other Aaa Countries Austria and Luxembourg: Resistant Aaas Recent and Forthcoming Developments

17

Debt

Growth

Fiscal Consolidation

Austria

The measures taken in 2008 to support economic and financial markets generated increases in gross general government debt in relation to nominal GDP. The general government debt ratio is expected to rise to around 77% of GDP in 2011 from a level slightly below 60% in 2007. As in the case of Germany, Austria’s relatively solid public finances at the beginning of the crisis offer substantial room for manoeuvre and shock absorption without compromising the country’s very high debt affordability. However, Austrian banks’ substantial exposure to Central and Eastern Europe caused market concerns in early 2009. We have emphasized that almost 75% of such exposure resulted from business in more advanced and integrated EU countries. Furthermore, recent stress tests run by the OENB seem to confirm that increased provisioning and higher capitalization mean increased loss absorption capacity at the bank level.

There are no important structural imbalances in the real economy or in government finances. Private households are not particularly highly indebted. The savings rate is high. This means that the Austrian economy does not face brutal adjustment needs during the crisis. This is comparable with the situation in Germany. However, fiscal support measures will gradually be phased out. The production impulse from inventory liquidation will also fade soon. As a result, we only expect an anaemic economic recovery for Austria’s small and open economy, although this will also depend on the German economic cycle and world trade. There will probably be no endogenous economic growth in Austria before the end of 2010. Austrian real GDP is expected to shrink by around 3.5 % in 2009 and to grow at around 1% in 2010, mainly as a consequence of substantial fiscal action in Austria and abroad.

Fiscal consolidation will probably not happen before 2011/12 due to the expected fragile economic recovery, the extra spending to support the economy and the substantial weakness on the government revenue side. As a consequence, the general government deficit may head towards 4% in 2009 and reach around 5% in 2010 - a substantial deterioration from a nearly balanced position in 2008. As in other Eurozone countries, the plan is to let automatic stabilizers fully play their role in 2009 and 2010, refraining from substantial fiscal consolidation to prevent pro-cyclicality during this year and next. The government sees no room for further tax cuts further to the recent lowering of income taxes. Instead, a broadening of the tax base is targeted to secure government revenues in the coming years. As in previous years, fiscal consolidation will have to focus on healthcare spending and savings through reforms in public administration.

Luxembourg

Luxembourg’s debt was negligible at the start of the crisis. Although the rescue and recovery packages implemented by the authorities are likely to nearly triple the debt affordability ratios (i.e. interest payments/revenues of 1.5%), public debt will obviously remain very manageable at these levels. On the other hand, an effective exit strategy from recent stimulus measures – once macroeconomic conditions improve – would be needed to avoid entering a vicious circle of high fiscal deficits and fast-growing debt, especially in view of the long-term spending pressures stemming from an ageing population.

With a location in the centre of Europe and the availability of a highly educated, multilingual (including cross-border) workforce, Luxembourg’s economy has grown more rapidly than the European average, generating the highest per capita incomes in the EU. However, growth is likely to be constrained in the future. The financial sector is unlikely to reach its pre-crisis growth levels for several years at least. Moreover, cost competitiveness has diminished, which is expected to reduce the attractiveness of the country as a business location. Together, these are expected to lead to a reduction in potential growth and a further deterioration in employment prospects.

Public revenues are highly sensitive to the financial sector’s performance, so a slow recovery of the sector would likely keep the fiscal position in deficit. Luxembourg’s old-age pension obligations are particularly onerous because of the high salary base and the fact that cross-border workers are also qualified to receive benefits. The country’s small size and wealth may help the authorities achieve a quick and early exit from the stimulus package, but some popular resistance is expected when so many other European countries are likely to contravene the Growth and Stability Pact for several more years.

December 2009 „ Quarterly Monitor „ Aaa-Sovereign Monitor

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Quarterly Monitor

Debt trajectories 2007-2013 - Austria 55

60

65

70

75

80

85

90

4

Interest payments to GG revenue (%)

Debt to GDP (%) 2008

5

2007

2009

6

2010

2009 2010

2011

7

2011 2012

2012

2013

2013 2011

8

2012

9

10

2013

Reversibility band

11

Adverse scenario

Benign scenario

Baseline scenario

12

Debt Trajectories 2007-2013 - Luxembourg 5

10

0

20

25

2008 2007

2008

2009 2010

2011

2011

2009 2013

30

Debt/GDP (%)

2011 2010

2

Interest Payment / Revenue (%)

15

2013

2012

2012 2013

4

6

8

10

Reversibility band Adverse Scenario 12

18

December 2009 „ Quarterly Monitor „ Aaa-Sovereign Monitor

Benign Scenario

Baseline Scenario

Moody’s Aaa Sovereign Monitor

Quarterly Monitor

New Zealand and Switzerland: Resistant Aaas Recent and Forthcoming Developments

19

Debt

Growth

Fiscal Consolidation

New Zealand

Starting from a low level of debt, New Zealand has experienced a major change in its outlook for government debt. The government has already announced measures to deal with the deterioration, but debt ratios are still set to rise through 2013 under the scenario laid out in the budget. From 17.5% in 2008, the ratio of debt to GDP is forecast to more than double, but there is a risk it could go even higher. Nonetheless, these ratios are still much lower than they are for a number of other Aaa countries.

The economy recorded positive growth in Q2 2009 after five consecutive negative quarters. However, the growth rate, at just 0,1%, was not enough for the economy to be out of the woods yet. A number of important sectors in the economy continued to contract. For Q3, indicators including housing, retail sales and net migration indicate that momentum probably picked up a bit. The growth outlook has improved for 2010, with expected positive growth of around 3%.

Large operating deficits averaging close to 5% of GDP are forecast to characterize the 2010-2012 period, before beginning a gradual decline. Thus, fiscal consolidation will occur only in the middle of the next decade. This will depend on a pick-up in economic growth as well as the government’s ability to control expenditure. Measures to increase revenues may be necessary at some point, particularly if economic growth does not resume at a higher level.

Switzerland

Switzerland entered the economic crisis with favourable debt metrics, with general government debt at 40.9% of GDP in 2008. The government’s support for the financial system and three economic stimulus packages has caused these metrics to deteriorate, with interest payments to general government revenue expected to peak in 2010. Because the government was able to sell its stake in UBS profitably, the government was able to blunt the impact of its bank rescue on its finances, making their deterioration relatively small as compared to many other Aaa-rated countries.

Although the contraction in Swiss growth is milder than that seen among many of its Aaa peers, the country’s economic recovery is expected to be quite gradual in spite of the fiscal stimulus and the central bank’s quantitative easing programme. However, business surveys and new orders data indicate that the economy may be turning a corner, although the recovery is expected to be slow and shallow and real GDP growth is expected to remain largely flat in 2010.

The introduction of the debt brake rule in the early years of this decade meant that Switzerland entered the crisis with a fiscal surplus. The deficit will continue to rise in 2010 as further stimulus measures are introduced; these have required that an escape clause in the debt brake rule be invoked. In early November, the Federal Council announced a preliminary fiscal consolidation programme for 2011-2013 that will achieve around SFr1.5bn in annual savings in order to unwind the impact of stimulus measures on key fiscal metrics.

December 2009 „ Quarterly Monitor „ Aaa-Sovereign Monitor

Moody’s Aaa Sovereign Monitor

Quarterly Monitor

Debt Trajectories 2007-2013 - New Zealand 20

25

30

35

2

2007

Interest Payment / Revenue (%)

3

2010

2008

45

50

55

Debt/GDP (%)

2010

2009

4

40

2011

2011

5

2012 6

2013 2012

7 8 9

2013

10

Reversibility band

11

Adverse Scenario

Benign Scenario

Baseline Scenario

12

Debt trajectories 2007-2013 - Switzerland 39

41

43

45

Interest payments to GG revenue (%)

2

47

49

53

55

Debt to GDP (%)

3

2007

4 5 6

2013

2008

2012 2011 2009

2010 2010

2011

7

2012 8

2013

9 10 11

Reversibility band Adverse scenario

12

20

51

December 2009 „ Quarterly Monitor „ Aaa-Sovereign Monitor

Benign Scenario

Baseline scenario

Moody’s Aaa Sovereign Monitor

Quarterly Monitor

6. Special Focus: How Do We Measure Debt Financeability? 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 one way 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 demand 4 for government securities is simply to consider the stock of the country’s 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 socalled ‘original sin’ that has plagued emerging market governments for a long time. To take this situation into account, we marginally adjust a country’s 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 country’s 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 country’s 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 country’s 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.

4

5

21

Note that, by focusing purely on savings or financial stock, we leave aside the important question of the ability of governments to create an “artificial” demand for their debt - for instance, by getting the central bank to purchase debt or by altering financial regulation and requiring banks to hold more government debt. This is undoubtedly an element of financeability: some countries can do it; others cannot do so without triggering a run on the currency… However, much depends on the elusive concept of trust and credibility, so we do not attempt to measure it here. 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 they attract could easily be redirected to government securities. December 2009 „ Quarterly Monitor „ Aaa-Sovereign Monitor

Moody’s Aaa Sovereign Monitor

Quarterly Monitor

„

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 country’s domestic currency in global foreign exchange 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 high financeability. 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 Japan’s very high degree of financeability allows it to keep debt affordable despite the debt’s enormous size. Chart 3 uses another way to calculate the financial stock: it deducts the public debt from the stock of financial assets. In other words, it measures the stock of savings not already captured by the government and therefore arguably better reflects the potential that governments have for raising further public debt. One striking difference is Japan, which has already used much of its initial financeability, with the result that its residual financeability - while still considerable - has declined.

22

December 2009 „ Quarterly Monitor „ Aaa-Sovereign Monitor

Moody’s Aaa Sovereign Monitor

Quarterly Monitor

Chart 1 – The US and the others…

D om estic R esource M ob ilisation C apacity

100 High ability to attract international savings

90 80 70 60

High ability to capture domestic savings

50 40 United States

30 20 10 0

5

10

15

20

25

30

35

40

45

50

Ability To Tap International Savings

Chart 2 – Debt financeability (on a semi-logarithmic scale) 100

D o m estic R eso u rce M o b ilisatio n C ap acity

Russia 90

Slovakia

80 Mexico

Brazil

70

Poland 60

India

50

China

40

South Africa Singapore

Korea

30 20

Hong Kong

Finland Greece New Zealand Australia Belgium Sweden Austria Canada UK Ireland CH Italy Portugal Spain

Germany France US

Netherlands Japan

10 Denmark 0.1

1

10

Ability To Tap International Savings

23

December 2009 „ Quarterly Monitor „ Aaa-Sovereign Monitor

100

Moody’s Aaa Sovereign Monitor

Quarterly Monitor

Chart 3 – Debt financeability from a more forward-looking perspective

D o m estic R eso u rce M o b ilisatio n C ap acity

100 Russia

90

Slovakia

Brazil

80

India Mexico

70

Poland Greece

South Africa

60 China

50 40 30

Singapore Belgium Finland New Zealand Italy Hong Kong Japan Canada Austria Korea Australia Sweden UK CH Portugal Ireland

Germany France US

Spain Netherlands

20 10 Denmark 0.1

1

10

100

Ability To Tap International Savings

Description of the Axis X-Axis: Ability to Tap International Savings: Score from 1- 50 according to the country’s share of global foreign exchange turnover. For the Euro countries, we weighted the Euro turnover according to the size of the economy. 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”.

24

December 2009 „ Quarterly Monitor „ Aaa-Sovereign Monitor

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Quarterly Monitor

Appendix: Debt Projections Debt Projections: Benign Scenario France Aaa/STA

Nominal GDP Growth Budget Balance Interest Rate Debt/GDP

Germany Aaa/STA

4.1

-2.9

-3.4

-8.2

-8.3

-7.8

-7.2

-6.7

4.3

4.5

4.1

3.9

3.9

4.1

4.3

2013

82.1

87.5

91.5

94.6

5.9

6.2

6.5

7.1

7.7

Nominal GDP Growth

2.9

2.8

-4.2

1.8

2.4

2.1

2.3

-2.2

0.0

-3.0

-4.8

-4.4

-3.1

-2.2

Budget Balance

4.4

4.3

3.9

3.9

3.9

4.0

4.1

66.5

62.5

68.7

72.4

75.0

76.6

77.0

Intpaym/Revenue

6.4

6.2

5.7

6.1

6.4

6.9

7.1

Nominal GDP Growth

5.3

3.5

-3.5

2.6

5.9

5.4

5.5

-3.0

-5.1

-12.1

-12.6

-11.0

-10.2

-9.0

5.3

5.4

5.1

4.2

4.2

4.3

4.5

Budget Balance

42.6

50.9

61.7

73.5

80.2

86.3

90.8

Intpaym/Revenue

5.1

5.4

6.9

6.5

7.1

8.0

8.7

Nominal GDP Growth

6.0

2.6

-2.2

3.3

5.1

6.0

5.3

-2.3

-3.2

-10.0

-9.0

-7.2

-4.7

-4.7

Budget Balance

4.6

4.9

3.0

2.7

3.0

3.5

3.8

37.2

38.9

50.8

63.0

67.1

68.0

69.3

Intpaym/Revenue

8.9

10.0

8.1

8.3

11.0

12.7

14.2

Nominal GDP Growth

6.0

2.6

-2.2

3.3

5.1

6.0

5.3

-3.2

-5.9

-12.0

-10.2

-8.2

-5.0

-5.4

Budget Balance Interest Rate

3.3

3.4

2.9

2.6

2.9

3.3

3.6

62.2

69.8

84.4

96.7

100.1

99.5

99.9

Intpaym/Revenue

5.8

6.3

6.6

6.8

8.2

9.2

10.2

Nominal GDP Growth

4.9

4.1

-2.3

2.0

3.1

3.6

3.8

-2.2

-0.5

-4.4

-5.4

-5.1

-5.0

-4.8

Debt/GDP

Budget Balance Interest Rate

4.7

4.4

4.5

4.4

4.3

4.4

4.4

62.6

61.8

67.4

72.2

75.1

77.5

79.5

Intpaym/Revenue

5.9

5.2

6.0

6.2

6.4

6.7

6.9

Nominal GDP Growth

9.8

5.0

-4.6

4.3

3.5

4.2

4.4

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

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

Debt/GDP

Interest Rate

5.3

5.3

5.5

4.9

5.6

6.2

6.8

27.3

25.5

27.3

33.4

37.7

42.0

46.9

Intpaym/Revenue

3.2

3.1

3.2

3.1

4.3

5.3

6.5

Nominal 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

Debt/GDP

Switzerland Aaa/STA

3.8

75.7

Debt/GDP

New Zealand Aaa/STA

2012

3.1

5.7

Interest Rate

Luxembourg Aaa/STA

2011

2.4

67.8

Debt/GDP

Austria Aaa/STA

2010

-0.3

5.4

Interest Rate

US GG Aaa/STA

2009

2.9

64.7

Debt/GDP

US FG Aaa/STA

2008

4.4

Intpaym/Revenue

Interest Rate

UK Aaa/STA

Average 2004 to 2007

Interest Rate Debt/GDP Intpaym/Revenue

2.8

4.0

4.3

4.3

3.9

3.7

3.5

49.5

40.9

43.9

44.3

46.1

46.9

46.6

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 country’s debt, not to the market yield. The cells shaded in light green reflect a positive revision of Moody’s estimate compared to the forecast published in the September Aaa Sovereign Monitor, the ones shaded in light red a negative revision.

25

December 2009 „ Quarterly Monitor „ Aaa-Sovereign Monitor

Moody’s Aaa Sovereign Monitor

Quarterly Monitor

Debt Projections: Baseline Scenario Average 2004 to 2007

France Aaa/STA

Nominal GDP Growth Budget Balance Interest Rate

-0.3

2.4

3.1

3.8

4.1

-8.2

-8.3

-7.8

-7.2

-6.7

3.9

3.9

4.1

4.3

87.8

91.8

94.9

Intpaym/Revenue

5.4

5.7

6.0

6.2

6.5

7.2

7.7

Nominal GDP Growth

2.9

2.8

-4.2

1.8

2.4

2.1

2.3

-2.2

0.0

-3.0

-5.0

-4.6

-3.3

-2.3

Budget Balance

Nominal GDP Growth Budget Balance

4.4

4.3

3.9

3.9

3.9

4.0

4.1

66.5

65.9

73.1

76.7

79.1

80.3

80.3

6.4

6.2

6.1

6.5

6.8

7.2

7.5

5.3

3.5

-3.5

2.6

5.9

5.4

5.5

-3.0

-5.1

-12.1

-12.9

-11.3

-10.5

-9.2

5.3

5.4

5.1

4.2

4.2

4.3

4.4

42.6

51.8

68.6

80.3

86.4

91.8

95.5

Intpaym/Revenue

5.1

5.4

7.0

7.2

7.8

8.5

9.1

Nominal GDP Growth

6.0

2.6

-2.2

3.3

5.1

6.0

5.3

-2.3

-3.2

-10.0

-9.1

-7.3

-4.7

-4.7

Budget Balance

4.6

4.9

3.0

2.7

3.0

3.4

3.8

37.2

40.2

53.2

65.3

69.2

69.8

70.8

Intpaym/Revenue

8.9

10.0

8.4

8.7

11.3

13.0

14.5

Nominal GDP Growth

6.0

2.6

-2.2

3.3

5.1

6.0

5.3

-3.2

-5.9

-12.0

-10.3

-8.2

-5.0

-5.5

Debt/GDP

Budget Balance Interest Rate

3.3

3.4

2.9

2.6

2.9

3.3

3.6

62.2

71.1

86.7

99.0

102.2

101.2

101.4

Intpaym/Revenue

5.8

6.3

6.7

7.0

8.4

9.4

10.4

Nominal GDP Growth

4.9

4.1

-2.3

2.0

3.1

3.6

3.8

-2.2

-0.5

-4.4

-5.5

-5.2

-5.1

-4.9

4.7

4.4

4.5

4.4

4.3

4.4

4.4

Debt/GDP

Budget Balance Interest Rate Debt/GDP

62.6

62.6

69.1

73.9

76.7

78.9

80.8

Intpaym/Revenue

5.9

5.2

6.1

6.4

6.6

6.8

7.1

Nominal GDP Growth

9.8

5.0

-4.6

4.3

3.5

4.2

4.4

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

Intpaym/Revenue

0.5

0.8

1.5

1.5

1.7

2.0

2.1

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

27.3

25.5

27.3

33.4

37.7

42.0

46.9

Intpaym/Revenue

3.2

3.1

3.2

3.1

4.3

5.3

6.5

Nominal 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

Debt/GDP

Switzerland Aaa/STA

2.9 -3.4

82.5

Interest Rate

New Zealand Aaa/STA

4.4 -2.9

4.1

Debt/GDP

Luxembourg Aaa/STA

2013

76.1

Interest Rate

Austria Aaa/STA

2012

4.5

Intpaym/Revenue

US GG Aaa/STA

2011

68.1

Debt/GDP

US FG Aaa/STA

2010

4.3

Interest Rate

UK Aaa/STA

2009

64.7

Debt/GDP

Germany Aaa/STA

2008

Interest Rate Debt/GDP Intpaym/Revenue

2.8

4.0

4.3

4.3

3.9

3.7

3.5

49.5

40.9

43.9

44.3

46.1

46.9

46.6

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 country’s debt, not to the market yield. The cells shaded in light green reflect a positive revision of Moody’s estimate compared to the forecast published in the September Aaa Sovereign Monitor, the ones shaded in light red a negative revision.

26

December 2009 „ Quarterly Monitor „ Aaa-Sovereign Monitor

Moody’s Aaa Sovereign Monitor

Quarterly Monitor

Debt Projections: Adverse Scenario Average 2004 to 2007

France Aaa/STA

Nominal GDP Growth Budget Balance Interest Rate

-0.3

1.9

2.6

3.3

3.6

-8.2

-9.3

-9.3

-9.3

-9.5

3.9

4.4

5.2

5.9

91.1

97.5

103.6

Intpaym/Revenue

5.4

5.7

6.0

6.2

7.5

9.5

11.5

Nominal GDP Growth

2.9

2.8

-4.2

1.3

1.9

1.6

1.8

-2.2

0.0

-3.0

-6.0

-6.0

-5.1

-4.7

Budget Balance

4.4

4.3

3.9

3.9

4.3

4.9

5.5

66.5

65.9

73.1

78.1

82.5

86.2

89.3

Intpaym/Revenue

6.4

6.2

6.3

6.7

7.8

9.3

10.7

Nominal GDP Growth

5.3

3.5

-3.5

2.1

5.4

4.9

5.0

-3.0

-5.1

-12.1

-13.9

-12.7

-12.6

-12.0

Budget Balance

Nominal GDP Growth Budget Balance

5.3

5.4

5.1

4.2

4.7

5.4

6.0

42.6

51.8

68.6

81.6

90.0

98.2

105.3

5.1

5.4

7.0

7.2

9.0

11.3

13.5

6.0

2.6

-2.2

2.8

4.6

5.5

4.8

-2.3

-3.2

-10.0

-10.1

-8.6

-6.5

-7.0

4.6

4.9

3.0

2.7

3.5

4.4

5.2

37.2

40.2

53.2

66.5

72.2

74.9

78.3

Intpaym/Revenue

8.9

10.0

8.4

8.8

13.6

17.7

21.8

Nominal GDP Growth

6.0

2.6

-2.2

2.8

4.6

5.5

4.8

-3.2

-5.9

-12.0

-11.3

-9.6

-6.9

-8.0

Debt/GDP

Budget Balance Interest Rate Debt/GDP Intpaym/Revenue Nominal GDP Growth Budget Balance Interest Rate

3.3

3.4

2.9

2.6

3.3

4.0

4.8

62.2

71.1

86.7

100.4

105.6

106.9

109.9

5.8

6.3

6.7

7.0

9.7

12.1

14.8

4.9

4.1

-2.3

1.5

2.6

3.1

3.3

-2.2

-0.5

-4.4

-6.5

-6.6

-7.0

-7.3

4.7

4.4

4.5

4.4

4.8

5.3

5.8

62.6

62.6

69.1

75.2

79.9

84.4

88.9

Intpaym/Revenue

5.9

5.2

6.1

6.4

7.4

8.7

10.0

Nominal GDP Growth

9.8

5.0

-4.6

3.8

3.0

3.7

3.9

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

Intpaym/Revenue

0.5

0.8

1.5

1.6

2.0

3.0

3.6

Nominal GDP Growth

6.2

0.9

2.1

4.3

4.0

5.2

5.0

Budget Balance

5.0

2.9

-2.8

-6.0

-7.0

-7.9

-9.0

Debt/GDP

Interest Rate

5.3

5.3

5.5

4.9

6.2

7.1

8.2

27.3

25.5

27.3

34.5

40.1

46.1

52.8

Intpaym/Revenue

3.2

3.1

3.2

3.1

4.9

6.6

8.7

Nominal GDP Growth

4.5

4.0

-0.9

0.6

1.6

1.8

2.0

Budget Balance

0.0

-0.4

-2.9

-4.7

-3.9

-3.3

-2.7

Debt/GDP

Switzerland Aaa/STA

2.9 -3.4

83.9

Interest Rate

New Zealand Aaa/STA

4.4 -2.9

4.1

Intpaym/Revenue

Luxembourg Aaa/STA

2013

76.1

Debt/GDP

Austria Aaa/STA

2012

4.5

Interest Rate

US GG Aaa/STA

2011

68.1

Debt/GDP

US FG Aaa/STA

2010

4.3

Interest Rate

UK Aaa/STA

2009

64.7

Debt/GDP

Germany Aaa/STA

2008

Interest Rate Debt/GDP Intpaym/Revenue

2.8

4.0

4.3

4.3

4.2

4.5

4.7

49.5

40.9

43.9

45.5

48.7

51.1

52.8

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 country’s debt, not to the market yield. The cells shaded in light green reflect a positive revision of Moody’s estimate compared to the forecast published in the September Aaa Sovereign Monitor, the ones shaded in light red a negative revision.

27

December 2009 „ Quarterly Monitor „ Aaa-Sovereign Monitor

Moody’s Aaa Sovereign Monitor

Quarterly Monitor

Moody’s 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 Rating Impact 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.

28

December 2009 „ Quarterly Monitor „ Aaa-Sovereign Monitor

Report Number: 121362 Senior Associates

Editor

Production Associate

Annette Fratantaro Cyril Audrin Jose Abad

Maya Penrose

David Ainsworth

CREDIT RATINGS ARE MOODY'S INVESTORS SERVICE, INC.'S (MIS) CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES. MIS DEFINES CREDIT RISK AS THE RISK THAT AN ENTITY MAY NOT MEET ITS CONTRACTUAL, FINANCIAL OBLIGATIONS AS THEY COME DUE AND ANY ESTIMATED FINANCIAL LOSS IN THE EVENT OF DEFAULT. CREDIT RATINGS DO NOT ADDRESS ANY OTHER RISK, INCLUDING BUT NOT LIMITED TO: LIQUIDITY RISK, MARKET VALUE RISK, OR PRICE VOLATILITY. CREDIT RATINGS ARE NOT STATEMENTS OF CURRENT OR HISTORICAL FACT. CREDIT RATINGS DO NOT CONSTITUTE INVESTMENT OR FINANCIAL ADVICE, AND CREDIT RATINGS ARE NOT RECOMMENDATIONS TO PURCHASE, SELL, OR HOLD PARTICULAR SECURITIES. CREDIT RATINGS DO NOT COMMENT ON THE SUITABILITY OF AN INVESTMENT FOR ANY PARTICULAR INVESTOR. MIS ISSUES ITS CREDIT RATINGS WITH THE EXPECTATION AND UNDERSTANDING THAT EACH INVESTOR WILL MAKE ITS OWN STUDY AND EVALUATION OF EACH SECURITY THAT IS UNDER CONSIDERATION FOR PURCHASE, HOLDING, OR SALE. © Copyright 2009, Moody’s Investors Service, Inc., and/or its licensors and affiliates (together, "MOODY'S”). All rights reserved. ALL INFORMATION CONTAINED HEREIN IS PROTECTED BY COPYRIGHT LAW AND NONE OF SUCH INFORMATION MAY BE COPIED OR OTHERWISE REPRODUCED, REPACKAGED, FURTHER TRANSMITTED, TRANSFERRED, DISSEMINATED, REDISTRIBUTED OR RESOLD, OR STORED FOR SUBSEQUENT USE FOR ANY SUCH PURPOSE, IN WHOLE OR IN PART, IN ANY FORM OR MANNER OR BY ANY MEANS WHATSOEVER, BY ANY PERSON WITHOUT MOODY’S PRIOR WRITTEN CONSENT. All information contained herein is obtained by MOODY’S from sources believed by it to be accurate and reliable. Because of the possibility of human or mechanical error as well as other factors, however, such information is provided “as is” without warranty of any kind and MOODY’S, in particular, makes no representation or warranty, express or implied, as to the accuracy, timeliness, completeness, merchantability or fitness for any particular purpose of any such information. Under no circumstances shall MOODY’S have any liability to any person or entity for (a) any loss or damage in whole or in part caused by, resulting from, or relating to, any error (negligent or otherwise) or other circumstance or contingency within or outside the control of MOODY’S or any of its directors, officers, employees or agents in connection with the procurement, collection, compilation, analysis, interpretation, communication, publication or delivery of any such information, or (b) any direct, indirect, special, consequential, compensatory or incidental damages whatsoever (including without limitation, lost profits), even if MOODY’S is advised in advance of the possibility of such damages, resulting from the use of or inability to use, any such information. The credit ratings and financial reporting analysis observations, if any, constituting part of the information contained herein are, and must be construed solely as, statements of opinion and not statements of fact or recommendations to purchase, sell or hold any securities. NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE ACCURACY, TIMELINESS, COMPLETENESS, MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE OF ANY SUCH RATING OR OTHER OPINION OR INFORMATION IS GIVEN OR MADE BY MOODY’S IN ANY FORM OR MANNER WHATSOEVER. Each rating or other opinion must be weighed solely as one factor in any investment decision made by or on behalf of any user of the information contained herein, and each such user must accordingly make its own study and evaluation of each security and of each issuer and guarantor of, and each provider of credit support for, each security that it may consider purchasing, holding or selling. MOODY’S hereby discloses that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by MOODY’S have, prior to assignment of any rating, agreed to pay to MOODY’S for appraisal and rating services rendered by it fees ranging from $1,500 to approximately $2,400,000. Moody’s Corporation (MCO) and its wholly-owned credit rating agency subsidiary, Moody’s Investors Service (MIS), also maintain policies and procedures to address the independence of MIS’s ratings and rating processes. Information regarding certain affiliations that may exist between directors of MCO and rated entities, and between entities who hold ratings from MIS and have also publicly reported to the SEC an ownership interest in MCO of more than 5%, is posted annually on Moody’s website at www.moodys.com under the heading “Shareholder Relations — Corporate Governance — Director and Shareholder Affiliation Policy.”