By Steven C. Johnson and Daniel Bases
NEW YORK, Sept 11 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
stabilisation 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
"If those negotiations fail to produce such policies,
however, Moody's would expect to lower the rating, probably to
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
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
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.