Moody's Updates Outlook for U.S. Debt Rating

Moody’s said today that budget negotiations during the 2013 congressional legislative session likely will determine the direction of the U.S. government’s Aaa rating and negative outlook.

In the Moody’s Investors Service report, “Update of the Outlook for the US Government Debt Rating,” the agency indicated:

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

No surprise there. Moody’s notes the difficulty in predicting when Congress will conclude negotiations that result in a budget package. The debt limit likely will be reached by end of this year, and the government’s ability to meet interest and other expenses with available resources should be exhausted within a few months thereafter. So expect the Aaa rating, with its negative outlook, to be maintained until the outcome of budget negotiations becomes clear.

However, Moody’s sees the maintenance of the Aaa rating and the negative outlook into 2014 as unlikely. It said:

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.