Bloomberg News

U.S. Rating by Moody’s Imperiled Without $1.2 Trillion in Cuts

November 23, 2011

Nov. 23 (Bloomberg) -- Reducing the $1.2 trillion of discretionary spending cuts set to begin in 2013 may have “negative rating implications” for the U.S.’s top credit ranking, according to Moody’s Investors Service.

The deficit reductions are to take place over 10 years and were triggered by a congressional panel’s failure this week to agree on alternative cuts of the same amount. Moody’s, which didn’t change the U.S.’s Aaa rating after the committee failed to reach agreement on Nov. 20, has a “negative outlook” on the country’s debt.

“If they were to eliminate that process or reduce that amount significantly, that would definitely be a negative for our thinking about the rating,” Steven Hess, senior credit officer at Moody’s, said today in an interview. “A change in that would increase deficits and therefore the debt over time and would definitely be negative.”

Standard & Poor’s, which downgraded the U.S. to AA+ on Aug. 5, also said the U.S. didn’t merit another downgrade after the 12-member bipartisan congressional committee reached an impasse amid Democrats’ opposition to reductions in programs such as Medicare and Republicans’ reluctance to increases in tax revenue. The committee was created in August by the Budget Control Act that raised the U.S. debt ceiling.

About half of the $1.2 trillion of the automatic reductions are to be in defense spending. Republican Senators Lindsey Graham of South Carolina and John McCain of Arizona said they are looking for other cuts to take the place of those the Pentagon faces. Representative Howard McKeon of California said he will introduce legislation to prevent the spending reductions to defense.

Veto Pledged

Even with lawmakers reluctant to embrace the automatic cutbacks that helped prevent downgrades, President Barack Obama has pledged to veto any efforts to undermine the spending reductions.

Tax cuts introduced by President George W. Bush’s administration that are due to expire at the end of 2012 are “one of the most important medium-term questions” for the U.S., Moody’s said today in a statement. Were the personal income-tax rates reductions allowed to end, the growth in debt relative to gross-domestic-product “could well be reversed in the middle of the decade,” the New York-based firm said.

“Given the amount involved, it is an important item,” Hess said of the expiring tax cuts. “It’s the next big item that’s actually on the agenda.”

--Editors: Kenneth Pringle, Dave Liedtka

To contact the reporter on this story: John Detrixhe in New York at jdetrixhe1@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net


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