Moody’s Warns Of Debt Downgrade If Congress Fails To Act
Moody’s warned the United States today that the nation could face a debt downgrade if lawmakers fail to reach a deal to avert the upcoming so-called “fiscal cliff”:
Moody’s Investors Service warned Tuesday that Congress will need to strike a deal on the “fiscal cliff” to avoid a second downgrade to the nation’s credit rating.
The rating agency said that budget negotiations in 2013 will likely determine the fate of the nation’s credit rating, adding that an inability to strike a deal with “specific policies” to change the nation’s debt trajectory would likely mean a downgrade.
Moody’s still rates the nation as a top-shelf AAA credit, but with a negative outlook as it has warned policymakers they must adjust the nation’s fiscal course to retain its financial reputation.
The good news for lawmakers is that if they can somehow strike a broad fiscal deal in the next 12 months, it will likely mean the nation can protect its AAA rating from Moody’s, and the agency would revoke its negative outlook in favor of a stable one.
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All three major rating agencies — Moody’s, FitchRatings and Standard & Poor’s — have warned that fiscal changes are needed to prevent future downgrades. Standard & Poor’s made history following the debt-limit fight by issuing the first-ever downgrade to the nation’s credit rating, citing the political brinksmanship that threatened the ability of the government to meet its obligations.
Moody’s made clear it will not wait forever for Congress to reach an agreement, saying it views maintaining the status quo — a top rating with a negative outlook — as “unlikely” going into 2014.
Also worth noting is that, in addition to the “fiscal cliff,” the nation will likely have to deal early next year with the need to increase the debt ceiling yet again.
Congress received similar warnings like this during the debt ceiling showdown, of course, and eventually Standard & Poor’s eventually downgraded our debt from AAA to AA+, although neither Moody’s nor Fitch ended up following them in that move. To date, the impact of the S&P downgrade has been minimal but there has been some speculation that credit markets would react negatively to a second or third downgrade without signs of significant progress in Washington toward getting the nation’s fiscal house in order.
On that note, it’s perhaps worth noting the comments by House Speaker John Boehner regarding his expectations of being able to reach a deal:
House Speaker John Boehner (R-Ohio) on Tuesday said he was “not confident at all” that Congress and the White House could strike a major debt deal, hours after Moody’s threatened a credit downgrade next year absent an agreement.
Boehner voiced his continued frustration that the Senate has not acted to avert both steep spending cuts and tax increases set to take effect in 2013. The cuts to defense were put in place in 2011 to spur action on a far-reaching fiscal plan.
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At a press conference in the Capitol, the Speaker was asked if he was confident the United States could avoid that fate.
“I’m not confident at all,” he replied. “The House has done its job, both on the sequester and on the looming tax hikes that’ll cost our economy 700,000 jobs. The Senate at some point has to act. On both of these, where’s the president? Where’s the leadership? Absent without leave.
It was not clear whether Boehner was expressing his pessimism about a deal before the end of this year or next. There is a growing consensus that while Congress could take limited action in a lame-duck session after the November election, a far-reaching accord will wait until a new Congress and a new administration is sworn in next year.
Senate Majority Leader Reid disagrees:
Reid told reporters that it is far too early to give up on the prospect of a bipartisan deal on taxes and spending during the lame-duck session after Election Day.
He said Republicans need to look at the glass “half full” instead of “half empty,” noting that Democrats are willing to extend the Bush-era tax rates for 98 percent of American families.
“I was disappointed when my friend John Boehner said today that he has no confidence on a budget deal. I think we have to look at the glass being half full and not half empty all the time. I’m confident that we will reach some kind of arrangement,” Reid said.
“It’s much, much too early to give up,” Reid added. “I’m not going to give up.”
Rhetoric aside, Reid surely has to recognize that the prospects of putting together the kind of comprehensive package that we’re talking about here during a lame-duck session after a contentious election is going to be next to impossible regardless of who wins. If Romney wins the Presidency, then Obama’s power to negotiate anything is going to be dead as a doornail on November 7th. If there are major changes in the make-up of Congress, such as a slim Republican takeover in the Senate, then there is going to be considerable outside pressure on the 112th Congress to let the big decisions be made by the 113th Congress. That’s why I’m convinced that all we’re likely to see coming out of a lame-duck session is going to be a kick-the-can bill that basically maintains the status quo for a given period, say six months to a year, and then leave the heavy lifting up to the next Congress.
Hell, this is nothing. The “fiscal cliff” is the small tip of a very large iceberg.
Social Security and Medicare are off budget items. The demographics of those programs are FUBAR and getting worse literally by the day. We have a huge generation of recent beneficiaries and soon-to-be beneficiaries. They’re going to have to be funded in large part by a small generation of people who largely are unemployable. So the elephant in the room is where will the government get the money. Printing money to cover the Boomers’ entitlements will lead to inflation. Raising payroll taxes will lead to less job creation and higher unemployment. Ergo it won’t end well. Not unless we radically change course and soon.
Remember when we had to reduce the deficit immediately or risk catastrophe? “NO YOU GUYS ARE SOLVING OUR LONG TERM DEFICIT CRISIS ALL WRONG!”
Summarized but factual. It’s not his fault though…..he was just a senator from Illinois fighting against raising the debt ceiling in 2006.
“The fact that we are here today to debate raising America’s debt limit is a sign of leadership failure. It is a sign that the US Government cannot pay its own bills. It is a sign that we now depend on ongoing financial assistance from foreign countries to finance our Government’s reckless fiscal policies……. Increasing America’s debt weakens us domestically and internationally. Leadership means that, “the buck stops here.’ Instead, Washington is shifting the burden of bad choices today onto the backs of our children and grandchildren. America has a debt problem and a failure of leadership. Americans deserve better.”
I think they’ll kick the can quickly.
I kind of wonder whether the sell-by date on some of the GOP arguments are past as well. Particularly this idea that keeping 98% of the Bush tax cuts is “inflexible.”
Like, keeping 98% of anything and giving up 2% is extreme.
At some point people will just wake up to what you are saying. You want 100% of everything you ask for, or you say, the other side is inflexible.
Bond markets are well aware there is no risk of insolvency for the United States and that each and every bond is backstopped by the Federal Reserve, which can never run out of money. The effect of another downgrade will be zilch, just like the last one and just like every downgrade to Japan. Bond auctions and yields can’t fail when they are underwritten by a central bank empowered to issue currency.
Is Moody’s under investigation again? It seems like we’re treated to these threats whenever someone brings up the CRA’s complicity in the great crash and continuing shenanigans.
Well, House Republicans were willing to have our debt rating downgraded once before, and it doesn’t look like they suffered any consequences (apart from historically low public approval ratings) for their actions.
I can’t think of good reason why I should expect anything different this time around.
meanwhile, i tried to open a savings account for my kid, the bank said they would open it but it would cost more than it would to hide his money under his mattress. so much for compound interest in the new millennium.
@bill: Welcome to the last decade or more…
@matt: well, i remember the 90’s when the media was chiding us for being “poor savers”! now we have to invest in something and hope it pans out…