Moody’s May Downgrade US Without Lower Debt Deal
Moody’s Investor Service issued a report today warning that the US credit rating will probably be downgraded if a deal is not reached to lower “the ratio of federal debt to GDP over the medium term.”
A press release from Moody’s indicates the AAA rating would be downgraded one notch to AA1. However this is dependent on budget negotiations in Congress. If Congress can reach a deal which outlines a plan to lower debt without creating a shock to the economy, the AAA rating will be maintained.
Last year Moody’s competitor Standard and Poor’s downgraded the US for the first time in history. S&P’s explanation of the decision to issue the downgrade placed blame on the nation’s high debt levels and the inability of Congress to reach an agreement to stabilize them during the contentious debt-ceiling negotiations.
Today’s warning from Moody’s strikes a similar tone “it is difficult to predict when during 2013 Congress will conclude negotiations that result in a budget package. The AAA rating, with its negative outlook, is likely to be maintained until the outcome of those negotiations becomes clear.” In other words, only Congressional failure to reach a serious deal to lower debt will result in a downgrade.
But time to reach a deal is limited. Moody’s report is being viewed as a warning that Congress can not simply undo the spending cuts and new taxes, aka the “fiscal cliff” set to be enacted January 1, 2013. One possible solution currently under consideration is to extend the current spending and tax rates by six months, moving the fiscal cliff a bit further off so that lawmakers have time to negotiate a deal after the election. Moody’s seems to leave open this recognizing that no negotiations are likely to be concluded on another path to controlling the debt before the January 1st deadline.
Last year, Speaker Boehner and President Obama were close to reaching an agreement on a $4 billion debt package when Obama demanded more “revenue” (tax increases) at the last minute. The negotiations never recovered and the agreement eventually reached in Congress set up the so-called “fiscal cliff” the nation is now facing. Unless Congress acts, automatic cuts and new taxes will kick in on January 1, 2013.