Moody's says more steps needed to save US credit rating

NEW YORK Thu Jan 3, 2013 4:01am IST

A Moody's sign on the 7 World Trade Center tower is photographed in New York August 2, 2011. REUTERS/Mike Segar/Files

A Moody's sign on the 7 World Trade Center tower is photographed in New York August 2, 2011.

Credit: Reuters/Mike Segar/Files

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NEW YORK (Reuters) - The United States must do more than the recently passed "fiscal cliff" measures if the country is to rescue its Aaa debt rating from its current negative outlook, rating agency Moody's Investors Service said on Wednesday.

Standard & Poor's said the deal does not affect its negative view of the U.S. credit outlook, and said more work remains ahead for policymakers.

The last minute deal passed on Tuesday to avert potentially devastating tax hikes and spending cuts clarifies the medium-term deficit and debt trajectory of the federal government, Moody's said in a statement.

However, it does not provide a basis for meaningful improvement in the government's debt ratios over the medium-term, Moody's said.

"Our ratings stance is to wait and see what the outcome of all of this is in the next few months, before we make any decision on the rating outlook or the rating itself," Steven Hess, lead U.S. sovereign credit analyst at Moody's told Reuters.

"It is an important step, but it is the first step," he said.

Lowering the U.S. budget deficits and setting them on a long-term, downward trajectory is needed in order to return the U.S. sovereign credit outlook to stable from negative.

"On the other hand, lack of further deficit reduction measures could affect the rating negatively," Moody's said.

Moody's placed the U.S. credit rating on a negative outlook August 3, 2011 when the Congress and the White House wrestled over a relatively routine measure of raising the debt ceiling to the point where the United States was on the brink of default before hammering out a deal.

That political impasse and near financial calamity prompted rival rating agency Standard & Poor's to take the unprecedented move of cutting the U.S. credit rating to AA-plus from AAA.

This week's budget compromise "doesn't affect our view of the country's credit outlook, given that we believe yesterday's agreement does little to place the U.S.'s medium-term public finances on a more sustainable footing," S&P said in a statement on Wednesday.

While the budget deal does reduce the risk of a recession in the world's biggest economy, the agency said, sticking points remain, including the so-called sequestration, a sweeping package of potential budget cuts.

"Republicans have indicated they will demand more spending cuts, while the White House has hinted at a harder line than it took in 2011, when political brinksmanship nudged the country toward default on its debt," the rating agency said.

S&P has a negative outlook on the U.S. credit rating while Fitch Ratings, much like Moody's, maintains the country's AAA with a negative outlook.

Moody's says it expects the debt ceiling limit, which was reached on December 31 and now has the U.S. Treasury employing extraordinary measures to meet its financial commitments, to be raised.

It believes the risk of default on Treasury bonds is "extremely low", but it does note that agreeing on an increase in the debt ceiling, which allows the U.S. to borrow more money to pay its obligations, will occur at the same time as debate on spending takes place.

"We will watch the process as it unfolds. The experience in 2011 shows that the debt ceiling can in fact become a negotiating tool. We're not sure what will happen in that regard," Hess said.

U.S. President Barack Obama has said he will not debate the debt ceiling this time around.

"I think this whole process has accelerated our ability to foresee the medium-term outlook in the sense that in February or March there will be significant actions on the expenditure side or not. We'll have a lot more information earlier in the year than we had expected," said Hess. (Reporting by Caryn Trokie, Luciana Lopez and Daniel Bases; Editing by Chizu Nomiyam, Leslie Gevirtz and Tim Dobbyn)

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