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Some AAA debt is more equal than others

With countries around the globe facing sizeable risks to their ability to finance their sovereign debt, Moody’s has decided to refine its Sorting Hat methodology for gauging the level of risk involved with even top-rated issues. (For the estimated seven people on the planet not familiar with Harry Potter, the Sorting Hat determined the house to which a new Hogwarts student would be assigned.) 

Countries with a AAA rating have now been assigned to one of three tiers within that rating, indicating Moody’s judgment about the potential impact of the current credit crisis on a country’s balance sheet and its ability to handle the level of public debt needed. The three segments are Resistant, Resilient, and Vulnerable.

The Resistant category includes Germany, France, Switzerland, and Austria because, according to Moody’s, they either entered the financial crisis in a relatively strong position or their economic models remain robust. (Australia, Canada, Denmark, Sweden, Norway, Finland, the Netherlands, Luxembourg, and Singapore also are considered Resistant, but Moody’s believes they face less need to issue public debt.)

The U.S. and U.K. are considered Resilient because even though their economic growth and public liabilities face what Moody’s delicately refers to as “considerable debt challenges,” the size of their economies, financial markets, capital flow, and debt levels relative to growth appear (to Moody’s, at least) to give them some ability to adjust to global conditions.

In the Vulnerable category are Ireland and Spain, which Moody’s considers to have only “moderate ability” to react to the credit crisis.

To hear the details of the conference call in which Moody’s economists discussed the categories, click here.

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