U.S. could face rating cut next year
Moody’s Investors Service, following fellow rating agency Standard & Poor’s, said the U.S. could lose its Aaa rating next year if Congress doesn’t take orderly action to reduce the nation’s debt.
From the Wall Street Journal’s story:
Specifically, it said if Congress repeals looming spending cuts and tax increases set to begin next year and doesn’t replace them with large-scale deficit-reduction measures, the government would lose its top-notch rating.
The warning comes as Washington has become consumed with the November elections and talks of a bipartisan deal to reduce the deficit have mostly stalled. But after the elections on Nov. 6, policy makers have to deal with numerous fiscal issues before Jan. 1, 2013, when the large spending cuts are set to begin and tax rates would rise for more than 100 million Americans.
And Bloomberg’s coverage of the report:
The U.S. economy will probably tip into recession next year if lawmakers and President Barack Obama can’t break an impasse over the federal budget and if George W. Bush-era tax cuts expire in what’s become known as the “fiscal cliff,” according to a report by the nonpartisan Congressional Budget Office published on Aug. 22. The rating would likely be cut to Aa1 from Aaa if an agreement on the debt ratio isn’t reached, Moody’s said in a statement today.
Moody’s put the rating under review with a negative outlook in August 2011, when the U.S. pushed back a decision on spending and raised its so-called the debt ceiling after months of political wrangling. S&P cut its rating to AA+ that month, blaming the nation’s political process. Treasuries rallied as investors ignored the reduction, with the yield on the benchmark 10-year note since declining to record lows and drawing the ire of investors such as Warren Buffett, the biggest shareholder of Moody’s, who said after the S&P decision that the U.S. should be “quadruple-A.”
But does the Moody’s warning give the current government too much wiggle room? The report does state that they have until the beginning of next year, leaving Congress the ability to not take any action during the lame duck session after the November election.
And given recent history to defer hard choices, it isn’t likely that Congress will take up some of these issues this year. It does seem, however, that the lame duck session is exactly when some of these issues should be tackled.
As the Forbes story points out:
Moody’s is hardly the only voice calling for fiscal discipline and action from Congress to address debt and deficits. Federal Reserve Chairman Ben Bernanke, who could announce another round of quantitative easing at the central bank’s meeting this week, has repeatedly stressed that monetary policy can only go so far in addressing the issues weighing on the U.S. economy.
Another wrinkle in the Moody’s note Tuesday: the ratings agency says that maintaining its outlook depends on a “relatively orderly” increase to the debt ceiling, which will likely be reached around the end of 2012. In the summer of 2011 that increase was anything but orderly, devolving into a partisan spat that in large part led to the S&P downgrade.
It’s hard to imagine that a new crop of legislators, eager to prove themselves, will set aside partisan politics to solve the problem, especially if the nation’s debt is one of the first issues in the new year.
It’s also important to note that actions take by S&P and Moody’s sometimes don’t matter to the broader market. According to Bloomberg:
For investors and policy makers, predicting the consequences of a rating change by S&P or Moody’s — the dominant issuers of debt scores — may be little different from flipping a coin.
Almost half the time, government bond yields fall when a rating action suggests they should climb, or they increase even as a change signals a decline, according to data compiled in June by Bloomberg on 314 upgrades, downgrades and outlook changes going back as far as 38 years. The rates moved in the opposite direction 47 percent of the time for Moody’s and for S&P. The data measured yields after a month relative to U.S. Treasury debt, the global benchmark.
Investors could take some comfort in that expect that last year’s debt ceiling debacle rattled global markets and shook the confidence of investors, especially overseas. The Dow Jones Industrial Average lost about 5 percent in the days surrounding the debate as investors struggled to figure out what Congress would do, according to a USA Today story at the time.
Politico’s Ben White wrote that last year’s debate was a “scary erosion in confidence” as consumers lost faith in the government’s ability to boost the economy. Given the tepid economic gains made since then, the last thing the U.S. needs is another partisan debt debate that rocks confidence.