Moody's confirms U.S. rating at Aaa, outlook negative

NEW YORK Tue Aug 2, 2011 7:16pm EDT

A view of Capitol Hill in Washington August 1, 2011. REUTERS/Joshua Roberts

A view of Capitol Hill in Washington August 1, 2011.

Credit: Reuters/Joshua Roberts

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NEW YORK (Reuters) - Moody's Investors Service on Tuesday confirmed its Aaa rating of the United States, citing the decision to raise the debt limit, but assigned a negative outlook that could pressure lawmakers to cut the U.S. deficit.

Moody's decision came a few hours after rival Fitch Ratings upheld its AAA rating of the United States. Fitch also warned the world's largest economy must cut its debt burden to avoid a future downgrade.

Standard & Poor's, which many predict will cut its rating, has yet to give its opinion of the deficit reduction and debt ceiling deal hammered out in Washington and signed into law on Tuesday.

S&P, like Moody's prior to Tuesday's decision, also had the rating on review for a possible downgrade. Moody's negative outlook means a downgrade is still possible in the next 12 to 18 months.

The budget deal allows the U.S. Treasury to keep servicing U.S. debt obligations, pay soldiers and make social security payments.

"Today's agreement is a first step toward achieving the long-term fiscal consolidation needed to maintain the US government debt metrics within Aaa parameters over the long run," Moody's said in a statement.

With the debt ceiling issue solved, the agency is now focusing on the long-term challenges to U.S. public finances, burdened by a deficit that has reached about 9 percent of the country's economy -- close to the highest since World War II.

The Senate approved the $2.1 trillion deficit-reduction plan in a 74 to 26 vote. It passed the Republican-controlled House of Representatives on Monday, warding off the specter of a catastrophic U.S. debt default.

The bill lifts the debt ceiling enough to last beyond the November 2012 elections, calls for $2.1 trillion in spending cuts spread over 10 years and creates a bipartisan joint House and Senate committee to recommend a deficit-reduction package by late November. It does not include any tax increases.

Moody's said that while the combination of the congressional committee process and automatic triggers provides a mechanism to induce fiscal discipline, this framework is untested.

"They are simply saying they are waiting to see what develops with the new deficit budget commission. It is certainly reasonable given the U.S.'s fiscal position. Now that we are past the deficit issue, the fiscal issues over the long run will be the story," John Silvia, chief economist at Wells Fargo Securities in Charlotte, North Carolina.

U.S. markets were closed by the time Moody's issued its decision.

The dollar, already falling against the Swiss franc after weak economic data, fell to an all-time low in the wake of Fitch's statement. However, the greenback held steady against the euro, which is struggling with a sovereign debt crisis of its own.

"Because it had been discussed as a possibility, I think the market was ready for this (Moody's). The market is now much more focused on the employment number on Friday morning and economic fundamentals and how deep is this soft patch. The U.S. market is focused on Europe, the weakness in Europe and on Friday's number," said Quincy Krosby, market strategist at Prudential Financial in Newark, New Jersey.

On Friday the U.S. jobs report is forecast to show 85,000 new jobs were created in July, up slightly from the prior month with the unemployment rate holding steady at a hefty 9.2 percent.

"As the U.S. economy slows down, the deficit reduction is not a real deficit reduction, because GDP ends up being lower so the debt reduction ends up being smaller," said Aroop Chatterjee, currency strategist at Barclays Capital in New York.

"That is an additional factor on the minds of markets when they are looking at this, in terms of the debt deal, is what is done in Congress really meaningful in keeping the probability of a downgrade low? And in our view, the probability of a downgrade continues to be pretty high," he said.

(Reporting by Walter Brandimarte and Daniel Bases)

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Comments (6)
Ok, regardless of your politics, are you having trouble visualizing what the debt “looks like”? Here’s something you should see to put it into perspective:

Aug 02, 2011 6:18pm EDT  --  Report as abuse
redmerlot wrote:
We’re Aaa rated eh?

According to Moody’s, Aaa means,
“Aaa – highest rating, representing minimum credit risk”

Just try and get yourself a loan or a mortgage from a bank with a credit history like our Federal Government’s.

- Debt that always grows (we never pay it off), keeping creditors essentially waiting forever to get all their money – sounds like default to me

- Only source of revenue to pay the increasing debt is by fabicating currency. In other words, if you or I did it, they would call it counterfeiting. – Sounds like default to me.

- Continue to change the “rules of the game” on Social Security – reducing benefits, delaying retirement age, and taxing the benefits, in order to compensate for no having the money to pay the originally promised benefits – that sounds like default to me.

The only reason the Federal Gov’t is not in default on its debt is because it can cheat at the game – changing the rules, printing money, borrowing more and more against a Ponzi scheme.

Aaa? I’d have to call it
“Ca – highly speculative, or near default”

Aug 02, 2011 6:46pm EDT  --  Report as abuse
EN3 wrote:
Sounds like black mailed to me. Now I will be the first to admit that america needs to control or spending. But that also need to start with, money’s spent outside of the united states. we need to start closing our military bases down, stop helping countries with their problems. Seems to me that and this world when america has a problem its america’s problem, but want somebody else has a problem then its own america we need your help oh you are a big country you can afford to help us you need to help us. We need to put significant taxes on anything that is being imported into the united states. We are the breadbasket of the world we feed a significant portion of the world population we just need to start charging more for those services.

Now will america do any of that no, why cuz we as americans do worry about the rest of the world and it is needlessly worry. You know we cannot in good faith hold the rest of the world hostage, because of food. But we do need to stop being the place of the world, we do need to be a rent countries from exporting products to our country by increasing the taxes on those imported items. And the united states just really need to stop handing money out there are other countries out there that can help out until america correction its financial problems

Aug 02, 2011 7:24pm EDT  --  Report as abuse
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