Posted on 03 Aug 2011
Moody’s Investors Service said Tuesday that the United States will retain its triple-A bond rating following passage of legislation to boost the debt ceiling. But the agency put a “negative” outlook on the rating, raising the specter of a future downgrade.
Moody’s said in a statement that the bill signed into law by President Barack Obama dealt with the immediate threat of a default that would have resulted from a failure to raise the country’s borrowing limit.
But the agency assigned a negative outlook to the triple-A rating to indicate that there is still a risk of a downgrade if the government’s fiscal discipline weakens or the economy deteriorates significantly.
A credit-rating downgrade typically leads to higher interest rates, and would have a huge impact on the economy by making it more expensive for the government, companies and consumers to borrow money. Moody’s has never given the U.S. government anything lower than its top rating since it began evaluating the country’s debt in 1917.
Earlier in the day, fellow ratings agency Fitch Ratings said that the action by Congress to boost the debt ceiling and make spending cuts was an important first step but “not the end of the process.”
Fitch said it expects to conclude its review of its U.S. debt rating by the end of August. Officials at Fitch suggested that they are looking for more progress in attacking the federal government’s debt problems.
Moody’s in its announcement noted that the legislation signed by Obama called for $917 billion in specific spending cuts over the next decade and established a special congressional committee charged with making recommendations to achieve an additional $1.5 trillion in deficit reduction over the next 10 years.
“While the combination of the congressional committee process and automatic triggers provides a mechanism to induce fiscal discipline, this framework is untested,” Moody’s said in its statement. “Should the new mechanism put in place by the Budget Control Act prove ineffective, this could affect the rating negatively.”
Moody’s and Fitch along with Standard & Poor’s are the three main ratings agencies that rate debt that is issued by governments and corporations.
The triple-A rating is the highest available and signifies an extremely low likelihood of default. All three agencies had issued warnings in recent weeks that the U.S. credit rating was in danger of a downgrade.