Exclusive: U.S. backup debt plan doesn't support rating: Moody's

NEW YORK Tue Jul 19, 2011 6:14pm EDT

Senate Minority Leader Mitch McConnell (R-KY) talks about his meeting with President Barack Obama regarding the country's debt ceiling, during a news conference at the Capitol in Washington May 12, 2011. REUTERS/Jonathan Ernst

Senate Minority Leader Mitch McConnell (R-KY) talks about his meeting with President Barack Obama regarding the country's debt ceiling, during a news conference at the Capitol in Washington May 12, 2011.

Credit: Reuters/Jonathan Ernst

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NEW YORK (Reuters) - A backup plan to raise the U.S. debt ceiling and avoid default could still lead to a negative outlook on the country's ratings, Moody's said on Tuesday, highlighting the plan's failure to substantially reduce the deficit.

The back-up plan offered by Senator Mitch McConnell would avoid any immediate downgrade of the coveted U.S. triple-A rating, Moody's analyst Steven Hess told Reuters in an interview, bringing relief to investors who fear an imminent downgrade of the coveted U.S. triple-A rating.

"But the numbers that are being discussed in terms of any possible deficit reduction coming out of this plan don't seem to be very large," Hess said. "Therefore, this plan might result in a negative outlook on the rating."

A negative outlook is a sign the rating may be downgraded in 12 to 18 months.

McConnell's plan, which is being negotiated with Senate Majority Leader Harry Reid, would include about $1.5 trillion in deficit-reduction measures.

Hess said a "much larger amount" of deficit-reduction measures would be necessary for Moody's to affirm U.S. ratings with a stable outlook.

In the most recent development in Washington on Tuesday, President Barack Obama supported efforts by a bipartisan group of U.S. senators with a more ambitious budget plan that includes $3.75 trillion in savings over 10 years.

Asked about the ideal size of the deficit-reduction measures, Hess said $4 trillion "could lead us to affirm the rating at Aaa with a stable outlook, if those measures were actually adopted."

"I'd rather not opine on the numbers in between," he said, also noting that Moody's does not have a view on whether that deficit reduction should be achieved via revenue increase or spending cuts.

McConnell's plan would authorize Obama to raise the debt limit in three increments, totaling $2.5 trillion -- without any mandatory spending cuts -- provided Obama's fellow Democrats go along with it.

The plan would avoid a feared default by the U.S. Treasury in August but would not eliminate the periodic uncertainty related to the debt ceiling, Hess said.

"That event risk would still be there because the debt limit would have to be raised again a couple of times before the end of 2012," Hess said.

Moody's currently has U.S. ratings on review for a possible downgrade to account for the growing risk that lawmakers fail to raise the debt ceiling before Treasury runs out of money to keep servicing its obligations.

It has said that, if the government avoids a default, it will likely affirm the country's rating at triple A but it will likely assign a negative outlook on the rating, unless there is a "substantial and credible" budget agreement to cut the deficit.

(Editing by Leslie Adler)

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Comments (12)
AllForLight wrote:
Plan “B”, as in a “B” rating for our bonds.

Jul 19, 2011 1:29pm EDT  --  Report as abuse
AllForLight wrote:
Pure politics has got us this far. US Congress hoping that spine implants will still be covered under Congressional health plan.

Jul 19, 2011 1:31pm EDT  --  Report as abuse
NukerDoggie wrote:
The ‘backup Plan B’ looks like something straight out of a sheister lawyer’s devious mind. It reminds of of Bill Clinton and “what is is”.

So Moody’s puts more pressure on politicos to come up with a real solution. Hmmm. In the process they give ammo to the TeaBaggers to diss this Plan B and take a hard line, possibly scuppering any attempt to pass anything but the plan they support.

We really could be looking at default on 8/2 and no deal to raise the debt cieling for weeks afterward.

Jul 19, 2011 1:41pm EDT  --  Report as abuse
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