Published November 07, 2012
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 repeated it would likely 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.
Fitch Ratings holds a similar view with its AAA rating and negative outlook, reiterating earlier on Wednesday that a credible deficit reduction plan must have both tax increases and spending cuts.
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.
S&P maintains a negative outlook, but is mindful of giving the new political cycle time to work out a plan in 2013 before making another ratings decision.
The election did not broadly change the political map, but Obama is expected to make a push for a bipartisan solution to the impending fiscal crisis.
Washington's status quo of divided government includes a narrower margin of victory for Obama over Republican challenger Mitt Romney. However, Democrats increased their majority in the Senate, as well as eroded, slightly, the Republican party's majority in the House of Representatives.
Political leaders face a daunting task because the United States is currently producing $1 trillion in annual deficits and has a national debt of more than $16 trillion, roughly equivalent to its gross domestic product.
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 amounting to $600 billion off the government's bottom line 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 that 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 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 repeated 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.
Earlier, Fitch Ratings, which also maintains a AAA credit rating on the United States with a negative outlook, said failure to avoid going over the fiscal cliff and raising the debt ceiling "would likely result in a rating downgrade in 2013."
Fitch said temporary fixes that avoid the brunt of the tax and spending measures means there still could be a downgrade because it wants to see a credible medium-term deficit reduction plan.
London-based David Riley, Fitch's lead sovereign analyst for the United States, told Reuters on Wednesday that, if the U.S. government could produce a credible plan it is optimistic on the economy.
"When you're looking at the U.S. from this side of the Atlantic, you say the outlook looks quite good compared to the UK and the rest of Europe. If you can resolve this gridlock in Congress and provide some clarity, there's probably upside to the U.S. economy," Riley said.