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Moody's warns may lower US rating

WASHINGTON--Moody's warned Tuesday it could strip the United States of its triple-A rating if Congress fails to cut the federal debt burden, a year after Standard & Poor's took away the country's top-notch mark.

“Budget negotiations during the 2013 Congressional legislative session will likely determine the direction of the U.S. government's Aaa rating and negative outlook,” the ratings firm said in a statement.

If the negotiations 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 Aaa rating will likely be affirmed and the outlook returned to stable, it said.

“If those negotiations fail to produce such policies, however, Moody's would expect to lower the rating, probably to Aa1,” the ratings agency said.

Standard & Poor's delivered the country its first-ever credit downgrade — cutting it one notch to AA+ — in August 2011, citing the political deadlock over the deficit.

In June, S&P reiterated that the reasons for the downgrade remained in place and that if anything they were deteriorating.

The Moody's warning came less than two months before the Nov. 6 election, with President Barack Obama fighting a close race for re-election against Republican foe Mitt Romney, and a congressional vote that could sway the balance of power between the parties.

Currently, Democrats dominate the Senate and Republicans control the House of Representatives.

Moody's said the country's Aaa rating, with a negative outlook attached, would not likely survive to 2014.

“The only scenario that would likely lead to its temporary maintenance would be if the method adopted to achieve debt stabilization involved a large, immediate fiscal shock — such as would occur if the so-called 'fiscal cliff' actually materialized — which could lead to instability,” it said.

The fiscal cliff — a mandated mixture of spending cuts and tax hikes — is set to occur at the beginning of 2013, unless bitterly divided lawmakers can find a way to avoid it.

John Boehner, the Republican House speaker, said Tuesday it was unlikely a deal to avoid the fiscal cliff could be reached, blaming inaction both by the Democratic-controlled Senate and the White House.

“I'm not confident at all,” Boehner said in response to a reporter's question.

“The Senate at some point has to act ... where is the president? Where's the leadership? Absent without leave.”

“Americans deserve a president who will get Washington moving on the solutions we know are needed to reduce our debt, bring jobs home and get our economy moving again.”

Moody's said if the fiscal cliff happened, it would need evidence that the economy could rebound from the shock of such steep cuts before it would consider altering the U.S. credit standing to a “stable” outlook.

Mufteeva Inna, an analyst at Natixis, noted that the pivotal role of the November elections on Moody's decision.

“If the Congress remains divided, independently of the name of the president, one should expect another round of fierce partisan negotiations on all fiscal issues involved,” she said.

Moody's said its rating outlook also assumes a relatively orderly process for the increase in the government's legal debt limit, which likely would be reached around the end of this year.

It said it would likely place the U.S. debt rating under review after the debt limit is reached but several weeks before the Treasury's resources are exhausted, noting it took a similar action during the summer of 2011's debt ceiling battle.

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