Moody’s To Downgrade US If No Deal To Cut Debt/GDP Ratio

WASHINGTON (MNI) – The following is the text of a statement Tuesday
by rating agency Moody’s:

Budget negotiations during the 2013 Congressional legislative
session will likely determine the direction of the US government’s Aaa
rating and negative outlook, says Moody’s Investors Service in the
report “Update of the Outlook for the US Government Debt Rating.”

If those negotiations lead to specific policies that produce a
stabilization and then downward trend in the ratio of federal debt to
GDP over the medium term, the rating will likely be affirmed and the
outlook returned to stable, says Moody’s.

If those negotiations fail to produce such policies, however,
Moody’s would expect to lower the rating, probably to Aa1.

Moody’s views the maintenance of the Aaa with a negative outlook
into 2014 as unlikely. The only scenario that would likely lead to its
temporary maintenance would be if the method adopted to achieve debt
stabilization involved a large, immediate fiscal shock such as would
occur if the so-called “fiscal cliff” actually materialized which could
lead to instability. Moody’s would then need evidence that the economy
could rebound from the shock before it would consider returning to a
stable outlook.

Moody’s notes that it is difficult to predict when during 2013
Congress will conclude negotiations that result in a budget package. The
Aaa rating, with its negative outlook, is likely to be maintained until
the outcome of those negotiations becomes clear.

The rating outlook also assumes a relatively orderly process for
the increase in the statutory debt limit, says Moody’s. The debt limit
will likely be reached around the end of this year, and the government’s
ability to meet interest and other expenses out of available resources
would likely be exhausted within a few months after the limit is
reached.

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 took a
similar action during the summer of 2011.

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