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Et Tu, Moody’s? Rating Agency Warns of U.S. Credit Downgrade

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Et Tu, Moody’s? Rating Agency Warns of U.S. Credit Downgrade

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Thirteen months after rival rating agency Standard & Poor’s stripped the U.S. of its top credit rating amid partisan debt-ceiling gridlock in Washington, Moody’s Investors Service says it too may cut its rating if the U.S. can’t get a handle on its budget and debt-to-GDP ratio. From Moody’s this morning:

Budget negotiations during the 2013 Congressional legislative session will likely determine the direction of the US government’s Aaa rating and negative outlook…. If those 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 rating will likely be affirmed and the outlook returned to stable.

If those negotiations fail to produce such policies, however, Moody’s would expect to lower the rating, probably to Aa1.

Moody’s timing certainly seems curious and conspicuous, given that its report on the U.S., which hinges on negotiations that will take place in 2013, comes out the morning of the 11th anniversary of the Sept. 11th attacks, in the midst of a heated presidential campaign less than two months before the November election, and during a week in which the Fed is widely expected to announce further quantitative easing measures, likely via further bond purchases.

Moody’s said it’s unlikely to maintain the combination of the Aaa rating with a negative outlook into 2014, and that the rating outlook assumes a relatively orderly process for the increase in the statutory debt limit. That debt limit will likely be reached around the end of this year, Moody’s notes, and the government’s ability to meet interest and other expenses out of available resources would likely be exhausted within a few months after the limit is reached.

“Under these circumstances, the government’s rating would likely be placed under review after the debt limit is reached but several weeks before the exhaustion of the Treasury’s resources,” Moody’s said, noting that it took a similar action during the summer of 2011.

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Last Updated on September 11, 2012

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