News Column

Moody's, S&P's Urge US to Tackle Debt

Jan. 3, 2013
broken U.S. piggy bank

The new Congress taking office Thursday faces a looming confrontation over the need to raise the US Treasury's legal debt limit, even after this week's deal to stave off the "fiscal cliff" crisis.

Wall Street ratings agency Moody's warned that the fiscal cliff deal "does not, however, provide a basis for a meaningful improvement in the government's debt ratios over the medium term."

On holiday in his birth state of Hawaii, US President Barack Obama late Wednesday signed legislation passed in the final hours of the old Congress to fend off across-the-board income tax increases and postponing major spending cuts for two months. The measure did allow income taxes to rise on households earning more than 400,000 dollars a year.

The so-called fiscal cliff, a combination of tax hikes and budget cuts, would have take a bite out of the US economy estimated at more than 600 billion dollars in 2013 alone. While it would have roughly halved the 1-trillion-dollar annual deficit, the massive austerity measures were forecast to batter the still-uncertain US recovery and perhaps throw the economy back into recession.

Steven Hess, senior vice president for sovereign risk at Moody's Investors Service, said that the agency calculates that the ratio of federal debt to gross domestic product would peak at about 80 per cent in 2014 and remain in the upper 70-per-cent range for the rest of the decade.

Such high debt "would leave the government less able to deal with future pressures from entitlement spending or from unforeseen shocks. Thus, further measures that bring about a downward debt trajectory over the medium term are likely to be needed to support the Aaa rating," Hess said.

Moody's still has US sovereign debt at the highest possible rating, while Standard & Poor's, a rival Wall Street ratings agency, cut the federal rating by one notch in August 2011, after a bruising battle in Congress over the last hike in the government's borrowing limit to 16.4 trillion dollars. Moody's has placed a negative outlook on the United States' Aaa rating.

The Treasury has now borrowed up to that threshold. Obama administration officials say that another hike is needed by late February or early March to be able to issue new bonds to pay off old debts and continue to cover the federal deficit, running at about 1 trillion dollars a year.

Hess said that Moody's "expects that further fiscal measures are likely to be taken in coming months that would result in lower future budget deficits, which are necessary if the negative outlook on the government's bond rating is to be returned to stable."

Failure to achieve deficit reductions "could affect the rating negatively," he said.

"Although Moody's believes that the debt limit will eventually be raised and that the risk of default on Treasury bonds is extremely low, this confluence of events adds uncertainty to the outcome of negotiations."

Source: Copyright 2013 dpa Deutsche Presse-Agentur GmbH

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