U.S. politics not broken, can cut debt: Moody's

WASHINGTON Wed Nov 9, 2011 8:16pm EST

A Moody's sign on the 7 World Trade Center tower is photographed in New York August 2, 2011.     REUTERS/Mike Segar

A Moody's sign on the 7 World Trade Center tower is photographed in New York August 2, 2011.

Credit: Reuters/Mike Segar

WASHINGTON (Reuters) - America's political system remains sound enough to overcome the partisan gulf that has widened over how to fix the country's fiscal mess, a top analyst from Moody's Investors Service said on Wednesday.

Steven Hess, Moody's lead analyst for the United States, said the battles in Washington over debt and deficits meant 2011 had not been "one of the better years."

But the rating agency factors the long-term view of America's political and financial institutions into its top-notch AAA rating on the country's debt.

"We still believe the U.S. has institutions that over time have proven themselves resilient," Hess told the Reuters Washington Summit.

"You have had divided government in the past, from time to time. We're in a period like that right now. But is it going to last forever? Are the institutions in the U.S. fundamentally flawed? I don't think so."

Attempts to halt the growth of the U.S. public debt, which stands at more than $14 trillion, have made limited progress with the House of Representatives under Republican control while the Democrats run the Senate.

Moody's has warned it could yet downgrade the United States but Hess said the country has greater leeway than other countries to incur higher levels of debt, because of the dominant role of the U.S. dollar in global markets. That helps keep demand strong for Treasury bonds and pushes U.S. interest rates lower than would be the case in other countries with similar fiscal challenges.

"The dollar is the preferred storer of value. As a global benchmark, the U.S. Treasury is unrivaled. We don't see that changing any time soon."

Moody's is looking at multiple factors before determining whether America's rating might be downgraded and has signaled that the agency could wait at least until 2013 before making a decision. That stands in contrast with Standard & Poor's which downgraded the U.S. rating by one notch in August after Congress came up with only a limited debt reduction deal.

"Volatility is not good and the market doesn't want that in the ratings. For a triple-A rating, our time frame has to be quite long term," Hess told Reuters.

S&P cited the partisan nature of Washington politics and its lack of faith in the U.S. Congress to tackle America's huge national debt as a major reason for its downgrade.

Hess said: "We tend to look not at all of the noise and everything that goes into this process, but what are the results."

Despite the rancorous atmosphere in Washington this year, Hess said, the debt ceiling was eventually raised and the Budget Control Act passed, which produced nearly $1 trillion in spending cuts and created the bipartisan congressional debt "super committee". The panel is tasked with finding at least $1.2 trillion in further savings over the next decade.

"I think that was a positive move in terms of the long-term fiscal outlook," Hess said. "And that was the result of all the divisive debate among the parties during the summer."

Even if the super committee fails to reach a deal by its November 23 deadline, Hess said it would not be a decisive factor in the review of the United States' credit rating which would look at a range of issues including the 2013 budget and the outcome of next year's elections.