Posted by: Schuyler R. Thorpe | January 25, 2012

Moody’s Warns Not To Skimp On Deficit

Moody’s warns U.S. not to skimp on deficit cuts

NEW YORK (Reuters) – Moody’s Investors Service on Wednesday warned that its top credit rating for the United States could be in jeopardy if lawmakers backtrack on $1.2 trillion in deficit cuts planned over 10 years.

The ratings firm said the failure of a U.S. congressional committee to reach an agreement on deficit reduction did not affect the Aaa rating, but any pullback from agreed automatic cuts to take effect starting in 2013 could prompt it to take action.

“While a change in the composition of the spending cuts would not be a major rating consideration, a reduction in the total amount that would increase the projected increase in federal debt over the coming decade could have negative rating implications,” Moody’s said in a statement.

Investors have raised concerns that Congress might try and undo the $1.2 trillion in automatic spending cuts — split evenly between domestic and military programs — that are to be triggered following the failure of the 12-member congressional “super committee” to reach a deal.

Republicans are already scrambling to shield the military from $600 billion in cuts, though President Barack Obama has vowed to veto any effort to undo those cuts.

The United States already suffered a blow to its top AAA credit rating in early August, when Standard & Poor’s cut its rating to AA-plus on concerns over the government’s budget deficit and rising debt burden.
On Monday, S&P said the super committee’s failure did not affect its current view on the rating.

The 12-member super committee, split evenly between Democrats and Republicans, abandoned its effort to reach a deal on Monday, with both sides blaming the other for the impasse.

Steven Hess, Moody’s lead analyst for the United States in New York, said the committee’s failure was not a surprise and said the critical factor for Moody’s is the total amount of deficit cuts.

Moody’s is basing its view of the current rating on the expectation that the full $2.1 trillion in deficit reduction will be carried out.
“We had been expecting there would be deficit reduction of that amount one way or the other,” Hess told Reuters in a phone interview.

Moody’s had placed a negative outlook on its rating on the United States on August 2, setting a general time frame of 18 months to two years in which it could decide whether to cut the rating.

Competitor Fitch, after affirming its AAA rating with a positive outlook on Monday, said the failure of the super committee “would likely result in a negative rating action — most likely a revision of the rating outlook to negative.”

Less likely would be a one-notch downgrade, Fitch said, adding that a decision would come before the end of the month.

Moody’s Hess said the committee could have come up with a bigger deficit reduction package, which would have been positive for the United States’ credit-worthiness, “but we didn’t necessarily expect that.”

“Some members of Congress appear to favor changing the mix of these spending cuts to lessen the impact on defense spending,” Moody’s said in its statement.

Hess said the composition of the spending cuts was not a major consideration.

“Well, not in a big way. A thorough analysis could indicate that it would have a marginal effect on the rate of economic growth over time depending on the composition of government spending. But we think that would be marginal and not something that would really affect the rating,” he said.

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