Ratings agencies don't exactly get the respect they once did after misjudging the strengths of banks and mortgage backed securities so spectacularly, but they remain some of the only measures for judging the financial strength of companies and countries.

So Fitch Ratings' affirmation of Bermuda's creditworthiness with a respectable AA+ rating is welcome. So too is its praise for the Island's "strong starting for facing the global economic crisis" and prudent fiscal policy. Still, Fitch's statement raised several red flags as well.

One was its projection that the economy would contract by two percent this year and would recover only modestly next year. This newspaper thinks that while the 2009 projection may be right, the Bermuda economy will continue to shrink for at least the first six months of 2010, so a "modest recovery" for the year may be optimistic.

It's worth noting too that in February 2009, Government projected a one to 1.5 percent decline in gross domestic product, so the economic picture seems to have worsened since then. What is just as worrying is that Fitch is projecting that total public debt will increase to 11.5 percent of gross domestic product this year, compared to Government estimates of 10.9 percent in February.

What's not clear is whether Fitch is including the $200 million guarantee to Butterfield Bank as a debt for the purposes of its calculations. In any event, it means that Bermuda's proud boast of not allowing debt to exceed ten percent of GDP will not be made for some time.

Of course, it can be argued that such spending acts as a stimulus to the economy at a time when private enterprise and individuals are spending less. There is nothing wrong with that, at least in a period of recession, and it would appear that Government spending is critical now. But it should go without saying that the money should be spent on support to people in difficulty, productive projects and long term infrastructure improvements that will pay returns in the future. It is not entirely clear that this is happening.

Because the construction sector looks likely to contract further around the end of the year as building projects in Hamilton come to an end, a further economic squeeze seems likely.

What is more worrying is that Government has already borrowed as much as it probably can, given, as Fitch and others have pointed out, that it is hindered by the lack of reserve currency status and its role as lender of last resort to the financial sector.

That means that if the economy does not start to recover in 2010, or the contraction this year is worse than expected, then the tax shortfall will necessitate unsustainable borrowing in 2010 – or tax increases when they can be least afforded.

That in turn could lead to a decrease in the Island's debt ratings, which would increase the cost of borrowing further.

The ratings agencies do not operate in a vacuum. In conducting their analyses, they talk to Government, regulators and the private sector to get the latest available information. So it seems likely that what Fitch has presented represents recent statistics, not all of them available to the public. In that sense, the affirmation of the rating is good news. But it also suggests that the economic picture is slightly worse than it was expected to be six months ago and the outlook is uncertain.