In the short term Bermuda should not be overly concerned that ratings firm Moody’s has placed the Island’s Aa2 rating on review for possible downgrade, but if the economy does not improve then major concerns lie ahead.That is the view of Peter Everson, who heads the Bermuda Chamber of Commerce’s economics committee.New York-based Moody’s Investors Service yesterday placed the Island’s Aa2 government bond rating on review for possible downgrade, reporting: “The review is prompted by the steep rise in government debt since the global financial crisis and by the prospect of further rises in the coming two years. In addition, the Island's economy remains in recession, making efforts to correct the fiscal deterioration more difficult.”The warning comes only days after Standard and Poor’s said it might downgrade the Island’s credit rating. Standard and Poor affirmed Bermuda’s ‘AA-/A-1+’ long and short term issuer credit rating last Thursday, but revised its outlook from ‘stable’ to ‘negative’.Responding to the news, Finance Minister Bob Richards noted the agency had recognised Government’s efforts to put “various initiatives in place aimed at economic improvement” and said Government remained optimistic for future economic growth.However, Shadow Finance Minister David Burt called it a “wake up call” and said: “The PLP, and now independent international observers, are shocked with the increase in spending and the record deficit contained in the first OBA Budget.”A ratings downgrade would likely result in Government having to pay a higher rate of interest on its borrowings.The Chamber of Commerce’s Mr Everson pointed out that nominal interest rates at major central banks are at artificially low levels and appear likely to remain so, and said: “One side effect of this market manipulation is to compress the spread between the various credit rating levels because lenders are penalised for owning US Treasuries and therefore have to buy other bonds. This benefits Bermuda and will probably outweigh any extra cost from a reduced credit rating.”In its ratings rationale Moody’s noted that Bermuda has one of the highest per capita incomes in the world (above $80,000) and that the Island’s regulatory institutions have allowed the international business sector to develop.“Despite its recent rise, government debt started from a very low level and is still at a level only slightly higher than the median for countries in the Aa2-A1 rating range,” said Moody’s.“The review for possible downgrade is prompted by the upward trend in government debt that has occurred since 2008, with the ratio of government debt to GDP rising from a low 5.9 percent at the end of the 2007-08 fiscal year to an estimated 28.1 percent at the end of 2012-13. Furthermore, the newly elected government's first budget, introduced in February, projects a large deficit that will raise this ratio further in the coming year to well over 30 percent.”Moody’s believes the rise in government deficits and debt was primarily due to a prolonged period of declining GDP, “which began in 2009 and looks likely to continue through 2013. Moderate growth may resume in 2014, but the long-term decline in the tourism industry and less dynamic growth in the insurance sector could limit the pace of future growth”.Moody’s said its rating review will focus on the Government’s plans to address the rising debt and implement reforms to boost economic growth. It warns: “A downgrade could result if the review concludes that debt will likely continue to rise.”Finance Minister Mr Richards said: “Although a possible downgrade is certainly not something we wish for Bermuda’s future, I was pleased to read in the report that Moody’s has recognised that the OBA is putting various initiatives in place aimed at economic improvement, as did the S&P report that was released last week. Government remains optimistic about future prospects for growth and will manage the economy accordingly.”Shadow Finance Minister Mr Burt said: “Though deficits are not new the lack of any concrete action to reduce the deficit, by reducing spending and increasing revenues, are alarming.”Mr Everson said the rating agencies had a “poor track record in being current with the facts. All this revision achieves is to bring them closer to the facts”.He said: “The only way for Bermuda to move forward is to grow the economy which requires enhanced competitiveness; greater levels of foreign direct investment and more jobs. Whether or not the ratings agencies do in fact reduce Bermuda’s rating in the future will be driven by whether the recovery comes soon enough for their liking.While Mr Everson was not overly concerned by the short term impact on Bermuda of a ratings downgrade he warned about longer term concerns.“If the economy does not respond, or fails to respond quickly enough, then Bermuda will fall into the debt trap and end up asking the IMF for bailout funds and debt relief as several Caribbean countries have done in recent times,” he said.“This would mean that important decisions are made outside of Bermuda by foreigners and Bermudians being told to accept the medicine. The recent developments in Cyprus and last year in Greece show clearly the misery inflicted on the broad mass of the population. This is not what any Bermudian would wish for their country or their fellow Bermudians.”