U.S. faces rating cut if 2013 budget talks fail: Moody's

NEW YORK Tue Sep 11, 2012 1:02pm EDT

The logo of credit rating agency Moody's Investor Services is seen outside the office in Paris October 24, 2011. REUTERS/Philippe Wojazer

The logo of credit rating agency Moody's Investor Services is seen outside the office in Paris October 24, 2011.

Credit: Reuters/Philippe Wojazer

NEW YORK (Reuters) - The United States may lose its top credit rating if next year's budget talks do not produce policies that gradually decrease the country's debt, Moody's Investors Service said on Tuesday.

The warning comes two months before national elections that may fail to loosen the current gridlock in budget policy.

Recent polls suggest that if the election were held tomorrow, President Barack Obama would win a second term while Republicans would strengthen their hold on Congress.

Moody's, which gives the United States the top Aaa credit rating but with a negative outlook, said Congress needs to put the debt level on a downward trajectory to maintain that rating.

If budget talks "lead to specific policies that produce a stabilization and then downward trend in the ratio of federal debt to GDP over the medium term, the rating will likely be affirmed and the outlook returned to stable," Moody's said in a statement.

"If those negotiations fail to produce such policies, however, Moody's would expect to lower the rating, probably to Aa1."

The dollar fell and the euro hit a four-month high after the ratings agency's statement.

Rival ratings agency Standard & Poor's stripped the United States of its top ratings last year after Congress failed to come up with a long-term deficit reduction plan and political bickering brought the country to the brink of default.

Moody's has in the past warned it could cut the United States' rating. On Tuesday it said its view on the U.S. economy and rating had not changed and the upcoming elections offered a chance to remind investors of its thinking.

"This appears to be the shot across the bow," said Dean Junkans, chief investment officer for Wells Fargo Private Bank. "Without some type of rational course to tackle debt reduction, a downgrade is likely."

The heated campaign for president has been underscored by vast differences between Democrats and Republicans about the right mix of tax increases and spending cuts needed to put public finances in order.

The ratings agency said the mix of policies used to reduce the deficit is not as important as agreeing to a credible plan.

"What we are really looking for is the debt trajectory. How you get there in terms of taxes versus spending, we are neutral on that," Steven Hess, Moody's lead sovereign credit analyst on the United States, told Reuters in a telephone interview.

Whether the election will resolve those differences is unclear. Recent polls show Obama has widened his lead over Republican Mitt Romney. Republicans, however, are expected to hold the House of Representatives and possibly win a majority in the Senate, which could reinforce partisan divisions in 2013 budget negotiations.

FISCAL CLIFF LOOMS

While Moody's said it probably won't alter the U.S. rating or outlook until the budget outlook becomes clear, the situation was "highly unlikely" to persist into 2014.

That would only happen, it said, if the method Congress adopted to reduce the deficit involved a large fiscal shock.

"Moody's would then need evidence that the economy could rebound from the shock before it would consider returning to a stable outlook," the agency said.

Such a shock may come if Congress allows a slate of spending cuts and tax hikes take effect as planned in 2013. While this would increase tax revenues and reduce U.S. debt quickly, economists fear it would amount to pushing the economy off a fiscal cliff.

The Congressional Budget Office said it could shrink U.S. gross domestic product by 2.9 percent in the first half of next year, plunge the country into a "significant recession," and cost 2 million jobs.

John Boehner, speaker of the U.S. House of Representatives and a Republican leader in Congress, said Tuesday he was "not confident at all" that divided lawmakers could agree to avoid going over the cliff.

(Editing by James Dalgleish and Andrew Hay)

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/
Comments (6)
Mott wrote:
This re-assessment threat has little credibility considering the following, as the basis for current rating is laughable.

Think for a moment on the validity of current AAA rating given the following -

- national debt ($16T) to have crossed over GDP ($15.3T)
- combined unfunded liabilities of $120T
- living beyond means – by an annual deficit of $1.3T (receipts of $2.4T while spending at the rate of $3.7T)
- annual interest payments on debt at nearly $0.5T and
- annual trade deficit at nearly $0.5T

Sep 11, 2012 10:43am EDT  --  Report as abuse
BillDexter wrote:
Uh-oh. This can only mean one thing. We’re going to hear from those tea-baggers again. Let’s see, what did we do last time they piped up? Oh, yeah. We refused to compromise on budget increases and blamed THEM for the budget debate gridlock, called THEM uncompromising, and them we went about our usual increases in the handouts we give to secure votes for Democrats. We continued blaming banks and rich people for the public debt we ran u up with our handouts and called it the ‘tea party downgrade’.

We can just keep doing that forever, right?

Sep 11, 2012 11:11am EDT  --  Report as abuse
Lloyd_L wrote:
@Mott
You left some things out;
Total of U.S. mandatory spending (Social Security, Medicare, Medicaid & etc.) plus interest on the national debt is projected to be $2,477T this year. That exceeds government revenue from all sources. It means we don’t have one cent left over for education, transportation, military spending and etc. unless we borrow it.
Interest on the national debt is projected to nearly quadruple in the next 10 years from $225B this year to $850B in 2022.

Source;
http://www.whitehouse.gov/sites/default/files/omb/budget/fy2013/assets/tables.pdf

Sep 11, 2012 11:19am EDT  --  Report as abuse
This discussion is now closed. We welcome comments on our articles for a limited period after their publication.