Moody's says looking for downward U.S. debt trajectory

NEW YORK Tue Sep 11, 2012 11:13am EDT

NEW YORK (Reuters) - Moody's Investors Service said on Tuesday the most critical factor for the United States to maintain its Aaa credit rating is to come up with a fiscal framework that puts the country's debt on a meaningful downward trajectory.

On December 31 a slate of temporary tax cuts is due to expire and spending cuts are to be implemented unless the U.S. government can agree on a new fiscal plan. This so-called "fiscal cliff" would likely lead to a "significant recession" and the loss of around 2 million jobs, the non-partisan Congressional Budget Office has forecast.

"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.

Earlier, Moody's issued a report to update investors on the outlook for the U.S. credit rating, currently at the highest level of Aaa, but with a negative outlook.

"You can say that if you go overboard on one way or the other, how does that compare to history?" Hess said. In a graphic comparing expenditures to revenues over the last 50 years, he noted that the fiscal balance is now more distorted than it has been since World War Two, when expenditures far exceeded tax revenues.

Moody's said its view on the U.S. economy and its rating has not changed, but the upcoming fiscal debate and elections were viewed as an opportunity to update investors on the ratings agency's current thinking.

"We felt as the end of the year approached and all of these factors - the fiscal cliff was coming and debt limit were coming and political outlook uncertain - we wanted to inform investors in advance of how we would handle them," Hess said.

(Editing by Leslie Adler)

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