Moody's May Downgrade US Without Lower Debt Deal

Moody's May Downgrade US Without Lower Debt Deal

Moody’s Investor Service issued a report today warning that the UScredit rating will probably be downgraded if a deal is not reached tolower “the ratio of federal debt to GDP over the mediumterm.”

A press releasefrom Moody’s indicates the AAA rating would be downgraded one notch toAA1. However this is dependent on budget negotiations in Congress. IfCongress can reach a deal which outlines a plan to lower debt withoutcreating a shock to the economy, the AAA rating will be maintained.

Lastyear Moody’s competitor Standard and Poor’s downgraded the US for thefirst time in history. S&P’s explanation of the decision to issuethe downgrade placed blame on the nation’s high debt levels and theinability of Congress to reach an agreement to stabilize them during thecontentious debt-ceiling negotiations.

Today’s warning from Moody’s strikes a similar tone “it is difficult to predict when during 2013 Congresswill conclude negotiations that result in a budget package. TheAAA rating, with its negative outlook, is likely to be maintaineduntil 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 warningthat Congress can not simply undothe spending cuts and new taxes, aka the “fiscal cliff” set to beenacted January 1, 2013. One possible solution currentlyunder 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 timeto negotiate a deal after the election. Moody’s seems to leave open this recognizing that nonegotiations are likely to be concluded on another path to controllingthe debt before the January 1st deadline.

Last year, Speaker Boehner and President Obama were closeto reaching an agreement on a $4 billion debt package when Obamademanded more “revenue” (tax increases) at the last minute. Thenegotiations never recovered and the agreement eventually reached inCongress 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.

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