Will Moody’s Downgrade U.S. Credit Rating?

According to Moody’s Investors Service, last week’s election has not changed the “highly polarized and unpredictable” political landscape that still threatens the nation’s credit rating. In an analysis released today and outlined in a set of research notes yesterday, the ratings agency described how the presidential election and the prospect of a continuing standoff on the fiscal cliff may impact a wide range of debt ratings, and said that it still assigns a “negative” outlook to U.S. credit ratings, meaning that a rating review likely would result in a downgrade.

“Despite the clarity gained from the election outcome, it remains difficult to predict when Congress will conclude negotiations that result in the passage of a budget package that either avoids or remedies the deleterious economic effects of the imminent fiscal shock,” wrote Moody’s.  “It is also not clear whether policymakers can reach consensus on measures that would result in a stable and ultimately declining debt trajectory.” In addition, Moody’s warned that the approaching debt limit—which various forecasts indicate could be reached as early as the end of this year or as late as next spring, and which the government thus would need to raise once again sometime in 2013—would present another threat to the nation’s and its investors’ financial stability.

Moody’s basically reiterated that the U.S. government’s credit rating is dependent on the outcome of fiscal talks in 2013. As it first said in September, if budget negotiations during the 2013 Congressional legislation session come up with a plan to gradually reduce the nation’s debt, the nation will keep its Aaa rating; if not, Moody’s will downgrade it to Aa1 by 2014.

Interestingly, Moody’s hints at an even earlier downgrade if lawmakers broker a deal that does not provide a credible, near-term path to debt reduction. Even more interesting, the agency stated once again that it can envision the prospect of a ratings benefit if the U.S. goes over the fiscal cliff: “[If] the ‘fiscal cliff’ strategy is adopted to achieve debt stabilization—involving a large, immediate fiscal shock that would improve government finances in the short term but likely result in recession and higher unemployment—we would maintain our Aaa rating with a negative outlook and await evidence that the economy could rebound before considering a return to a stable outlook,” wrote Moody’s Steven Hess and Bart Oosterveld on Monday.

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