Whether or not President Obama gets re-elected, the AAA rating probably won't be Geithner's problem.... [+]
Slightly more than a year after Standard & Poor’s cut its credit rating on the U.S., one of its fellow ratings agencies is warning that it may follow suit if the next Congress fails to get a grip on the country’s debt problem.
Next year’s budget negotiations “will likely determine the direction of the US government’s Aaa rating and negative outlook,” Moody's analysts write in an updated outlook on Uncle Sam’s credit standing Tuesday.
If such negotiations deliver policies that will stabilize and then lower the federal debt to GDP ratio over time, Moody’s will likely affirm its Aaa rating and return the U.S. rating to stable. If lawmakers fail to cut a deal, the rating will likely be cut to Aa1, to match that of S&P, which lowered its rating in August 2011.
While Moody’s will be content to play wait-and-see for now, the ratings agency is trying to draw a line in the sand at the end of 2013. From the report:
The maintenance of the Aaa with a negative outlook into 2014 is highly unlikely unless the method adopted to achieve debt stabilization involved a large, immediate fiscal shock with a resulting unstable economic situation. Such a shock could come from the so-called ‘fiscal cliff.’ In such circumstances we would await evidence that the economy could rebound from the shock before considering a return to a stable outlook.
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.
One thing that seems clear: a further downgrade will be a problem for a new Treasury Secretary. Timothy Geithner has repeatedly said he does not expect to stay on if President Obama wins re-election, and Republican challenger Mitt Romney would certainly want to install his own Treasury Secretary should he defeat the incumbent.
The dollar softened after the Moody's report, with the euro up to $1.28 and the British pound climbing to $1.61, while the 10-year Treasury note yield rose to 1.69%. Stocks were no worse for the wear, with the S&P 500 up 0.4% and the Dow Jones industrial average 0.5% higher. The S&P downgrade last summer threw the market for a loop, with the Dow moving more than 400 points for four consecutive days. (See "Taking Stock Of Wall Street's Wild Week.")
Worth noting: on the day S&P downgraded the U.S. rating the yield on the 10-year Treasury note was at 2.56%, so fears that a rating cut would raise borrowing costs has proven to be unfounded.
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