Tags: moodys | rating | us | budget

Moody's: US Rating Hinges on Fate of Budget Talks

Wednesday, 07 Nov 2012 12:21 PM

 

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Moody's Investors Service said on Wednesday it will hold off on its judgment of whether to cut its sovereign credit rating for the United States until after the 2013 budget process is completed.

The re-election of U.S. President Barack Obama removed the uncertainty over who would lead the country but the maintenance of the status quo in a still-divided Congress means the likelihood of a continued tough fight to hammer out a budget.

Moody's currently has the United States at its highest rating of Aaa, but with a negative outlook.

If policymakers are able to reach consensus and produce a budget that results in a stabilization of the fiscal outlook and "then a downward trend in the ratio of federal debt to GDP (gross domestic product) over the medium term," Moody's reiterated it would like affirm the Aaa rating and return the rating outlook to stable.

"In contrast, if negotiations fail to produce policies that lead to debt stabilization and ultimately reduction, then we expect to lower the rating, probably to Aa1," Moody's said, outlining a one notch downgrade.

In August 2011 rival Standard & Poor's, in an historic move, cut its rating on the United States by one notch to AA-plus from AAA over the political gridlock in Washington that produced an environment so divisive as to prevent deficit-reduction measures.

The immediate challenge of President Obama's second term will be coming to terms with the so-called "fiscal cliff" of automatic tax increases and spending cuts that could undermine the slow U.S. economic recovery.

If an agreement in Congress cannot be reached before year-end, the automatic spending cuts would go into effect but not necessarily lead to a downgrade, said Moody's, highlighting the immediate fiscal shock would improve government finances in the short-term but are likely to result in recession and higher unemployment.

Still, the ratings agency maintains that even if the government cannot agree and the economy goes over the fiscal cliff "we would maintain our Aaa rating with a negative outlook and await evidence that the economy could rebound from the shock before considering a return to a stable outlook".

Moody's also reiterated its warning that delays in coming to grips with the budget and new temporary measures that push the decision further out into 2013 without a credible timetable for implementing reforms could result in an outright downgrade.

© 2014 Thomson/Reuters. All rights reserved.

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