Credit ratings agency Moody’s has sent a harsh warning to the world’s biggest economy over its upcoming budget talks.
The agency said it would likely cut its AAA rating on US government debt, probably by one notch, if federal budget negotiations fail. The move is would likely make it more expensive for the US government to borrow money.
If Congress does not reach a budget deal, more than $600bn (£373bn) in spending cuts and tax increases will automatically kick in starting on January 1, a scenario that's been called the ‘fiscal cliff’ because it is likely to send the economy back into recession and drive unemployment up.
A year ago, Moody's cut its outlook on US debt to ‘negative,’ which acts as a warning that it might downgrade the rating, after wrangling over raising the US debt limit led the nation to the brink of default.
Rival agency Standard & Poor's took the drastic step of stripping the government of its AAA rating on its bonds around the same time. Fitch Ratings issued a warning of potential downgrade.
Moody's said it is difficult to predict when Congress will reach a deal on the budget, and it will likely keep its current rating and ‘negative’ outlook until the outcome of the talks is clear.
Moody's also noted that the government will likely again reach the debt limit by the end of the year, which means another round of negotiations in Congress on raising the limit if the US is to keep paying its bills.
“Under these circumstances, the government's rating would likely be placed under review after the debt limit is reached, but several weeks before the exhaustion of the Treasury's resources,” Moody's said.
Despite the rating cut last year from S&P and the warnings from Moody's and Fitch, the US has been able to continue borrowing at very low rates.
That's because investors are still buying US government bonds, as economic turmoil in Europe and uncertainty in other parts of the globe have left US debt and US dollars looking like safe bets. In contrast, bond investors demand high rates from troubled countries like Spain and Italy.
The stock markets plunged when the downgrade happened in August 2011, but Moody's warning today did little to ruffle traders. The major market indexes were all modestly higher in morning trading.