Ratings agency Moody's repeated a warning Monday it could downgrade the United States before 2013 if the fiscal or economic outlook weakens significantly, but said it saw the potential for a new debt agreement in Washington to cut the budget deficit before then.
The announcement was done before the opening of US markets but following on Friday’s decision by Standard & Poor to strip the United States of its AAA rating. Moody's said in a statement its own decision to affirm the AAA rating on August 2 was on the condition that further cuts were found.
For the Aaa rating to remain in place, we would look for further measures that would result in the ratio of federal government debt to GDP, for example, peaking not far above the projected 2012 level of near 75% by the middle of the decade and then declining over the longer term, Moody's analyst Steven Hess wrote in a report.
Last week's agreement suggests that coming to an agreement that would meet this criterion by early 2013 will be challenging, given the political polarization, but not necessarily impossible.
Questions about whether US lawmakers will be able to agree on further budget savings next year lie at the centre of the disagreement between the two ratings agencies. While S&P downgraded the United States to AA-plus after last week's debt deal fell short of its expectations, Moody's is willing to give the government more time tackle its debt problems.
Moody's said the United States continues to exhibit the characteristics compatible with a Aaa rating despite the expected further deterioration in the government's debt metrics in the next few years. Over time, this status could be threatened if further measures to address the long-term fiscal situation are not adopted, but it is early to conclude that such measures will not be forthcoming, Hess said.