Moody's Warns of Another US Credit Downgrade
The credit rating of the United States government may face another downgrade, this time by Moody's Investor Services, the company warned Tuesday. The president and Congress must negotiate a deal by the end of next year that will lower the nation's growing debt relative to its economic production to avoid the downgrade.
U.S. political leaders will have to negotiate a debt deal, a so-called "grand bargain," or Moody's will downgrade the nation's credit rating from AAA to AA1. The "grand bargain" could come as a result of negotiations to avoid the "fiscal cliff," in which spending cuts and tax increases will automatically go into effect beginning in 2013. The Congressional Budget Office has predicted that the "fiscal cliff" will cause a short term recession, but stopping it without replacing it with long term debt reduction would cause more problems for the economy in the future.
Maintaining the nation's AAA credit is unlikely, Moody's wrote in a press release. The company also noted that if the "fiscal cliff" is not avoided, the nation's economy would need to rebound quickly to avoid a downgrade.
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"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. Moody's would then need evidence that the economy could rebound from the shock before it would consider returning to a stable outlook."
Standard & Poor's already downgraded U.S. credit from AAA to AA1 last year. Moody's, Standard & Poor's and Fitch Ratings are the three main credit rating agencies for government debt. Last year, Moody's changed the U.S. credit rating outlook to negative, meaning it is at risk of a downgrade. Fitch has not changed the outlook or the rating from AAA.
Last week, the national debt surpassed $16 trillion and 100 percent of GDP. This means that the nation owes more to creditors (including itself) than the total economic output of the U.S. economy in a year.
President Obama and Speaker of the House John Boehner attempted to forge a "grand bargain" debt deal last summer as part of the negotiations to raise the nation's debt ceiling. It would have included tax reform to increase revenue and entitlement reform to reduce the growth in spending. Those negotiations fell apart, though, after Obama asked for (according to Obama), or demanded (according to Boehner), more revenue increases. A new book by veteran journalist Bob Woodward argues that Obama failed as a leader because he failed to pass the "grand bargain."
