NEW YORK – The U.S. government’s debt rating could be heading for the “fiscal cliff” along with the federal budget.
Moody’s Investors Service on Tuesday said it would likely cut its “Aaa” rating on U.S. government debt, probably by one notch, if budget negotiations fail.
If Congress and the White House don’t reach a budget deal, about $1.2 trillion in spending cuts and tax increases will automatically kick in starting Jan. 2, a scenario that’s been dubbed the “fiscal cliff,” because it is likely to send the economy back into recession and drive up unemployment.
A year ago, Moody’s cut its outlook on U.S. debt to “negative,” which acts as a warning that it might downgrade the rating, after partisan wrangling over raising the U.S. debt limit led the nation to the brink of default.
Rival agency Standard & Poor’s took the drastic step of stripping the government of its “AAA” rating on its bonds on Aug. 5, 2011. Fitch Ratings issued a warning of a potential downgrade.
In its report Tuesday, Moody’s said it is difficult to predict when Congress will reach a deal on the budget, and it will likely keep its current rating and “negative” outlook until the outcome of the talks is clear.
In Washington, Moody’s action didn’t spur the politicians responsible for making a deal to sit down at the table.
House Speaker John Boehner, an Ohio Republican, said he’s not confident that Congress can reach a deal and avoid a downgrade. No serious negotiations are expected until after the November elections.
Boehner’s Democratic counterpart in the Senate, Majority Leader Harry Reid, was far more hopeful that “some kind of agreement” would be reached after the elections. Reid suggested that the results of the election will weaken the GOP’s resolve to block tax increases on wealthier earners and that Republicans will be more willing to compromise.
Moody’s also noted that the government will likely again reach the debt limit by the end of the year, which means another round of negotiations in Congress on raising the limit if the U.S. is to keep paying its bills.