Moody's Reaffirms Triple-A, Puts US on Negative Outlook

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Moody's Investors Service reaffirmed the United States' triple-A rating but has put the country's credit rating on a negative outlook, which means the U.S. faces a one-in-three chance of a downgrade. 

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Moody's had already warned it would take this action. Standard & Poor's has already given the U.S. 50-50 odds of a downgrade if the government does not come up with a credible plan to cut the deficit by $4 trillion over the next decade, a sum Moody's has agreed with. 

 

What is striking here is that Moody's  also concurs with S&P which has already said the government's "acrimonious" fighting over deficit reduction is "detrimental" to the U.S.'s top-notch credit standing.

 

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In a press release in announcing that it is reaffirming the triple-A rating, Moody's now says that "wide political differences that have characterized the recent debt and fiscal debate, if they continue, could prevent effective policymaking."

 

It also warned there is "a risk of downgrade if (1) there is a weakening in fiscal discipline in the coming year; (2) further fiscal consolidation measures are not adopted in 2013; (3) the economic outlook deteriorates significantly; or (4) there is an appreciable rise in the US government's funding costs over and above what is currently expected."

 

And it says a rise in interest rates would hurt the country's ability to meet its interest payments owed on US debt and hurt deficit reduction. "A rise in borrowing costs above and beyond what is now expected would threaten efforts at fiscal consolidation," Moody's said in a statement.

 

 Here is Moody's full press release: New York, August 02, 2011 -- Moody's Investors Service has confirmed the
 Aaa government bond rating of the United States following the raising of
 the statutory debt limit on August 2. The rating outlook is now negative.
  
 Moody's placed the rating on review for possible downgrade on July 13 due
 to the small but rising probability of a default on the government's debt
 obligations because of a failure to increase the debt limit. The initial
 increase of the debt limit by $900 billion and the commitment to raise it
 by a further $1.2-1.5 trillion by yearend have virtually eliminated the
 risk of such a default, prompting the confirmation of the rating at Aaa.
  
 In confirming the Aaa rating, Moody's also recognized that today's
 agreement is a first step toward achieving the long-term fiscal
 consolidation needed to maintain the US government debt metrics within
 Aaa parameters over the long run. The legislation calls for $917 billion
 in specific spending cuts over the next decade and established a
 congressional committee charged with making recommendations for achieving
 a further $1.5 trillion in deficit reduction over the same time period.
 In the absence of the committee reaching an agreement, automatic spending
 cuts of $1.2 trillion would become effective.
  
 In assigning a negative outlook to the rating, Moody's indicated,
 however, that there would be a risk of downgrade if (1) there is a
 weakening in fiscal discipline in the coming year; (2) further fiscal
 consolidation measures are not adopted in 2013; (3) the economic outlook
 deteriorates significantly; or (4) there is an appreciable rise in the US
 government's funding costs over and above what is currently expected.
  
 First, while the combination of the congressional committee process and
 automatic triggers provides a mechanism to induce fiscal discipline, this
 framework is untested. Attempts at fiscal rules in the past have not
 always stood the test of time. Therefore, should the new mechanism put in
 place by the Budget Control Act prove ineffective, this could affect the
 rating negatively. Moody's baseline scenario assumes that fiscal
 discipline is maintained in 2012, despite pressures for fiscal relaxation
 that often precede general elections and the difficult negotiations that
 are likely to arise due to the scheduled expiration of the so-called
 "Bush tax cuts" at the end of that year.
  
 Second, further measures will likely be required to ensure that the
 long-run fiscal trajectory remains compatible with a Aaa rating.
 Specifically, Moody's expects to see a stabilization of the federal
 government's debt-to-GDP ratio not too far above its projected 2012 level
 of 73% by the middle of the decade, followed by a decline. Such a pattern
 would also support a smaller interest burden as a percentage of
 government revenues than is now projected. Wide political differences
 that have characterized the recent debt and fiscal debate, if they
 continue, could prevent effective policymaking around that time. Measures
 that further reduce long-term deficits would be positive for the rating;
 a lack of such measures would be negative.
  
 Third, recent downward revisions of economic growth rates and the very
 low growth rate recorded in the first half of 2011 call into question the
 strength of potential growth in the coming year or two. Continued very
 low growth would make fiscal consolidation more difficult. As a result,
 Moody's will also be monitoring the pace of growth as it relates to the
 fiscal effort.
  
 Finally, the US Treasury's cost of borrowing has remained low despite the
 recent political uncertainties surrounding the debt limit and the
 long-term fiscal outlook. While Moody's and economic forecasters
 generally expect interest rates to rise over the next few years, a rise
 in borrowing costs above and beyond what is now expected would threaten
 efforts at fiscal consolidation. Such a development would also be
 negative for the rating should it occur.
  
 Moody's has also confirmed the Aaa ratings of certain US
 government-guaranteed bonds issued by the governments of Israel and
 Egypt, which had been on review for possible downgrade as a result of the
 review of the US government's bond rating.

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