Moody’s: Tax Cut Extension Could Endanger U.S. Credit Rating

While the passage of the tax cut extension deal seems all but certain, the consequences of not accompanying with off-setting spending cuts may just be starting:

Moody’s warned Monday that it could move a step closer to cutting the U.S. Aaa rating if President Obama’s tax and unemployment benefit package becomes law.

The plan agreed to by President Obama and Republican leaders last week could push up debt levels, increasing the likelihood of a negative outlook on the United States rating in the coming two years, the ratings agency said.

A negative outlook, if adopted, would make a rating cut more likely over the following 12-to-18 months.

For the United States, a loss of the top Aaa rating, reduce the appeal of U.S. Treasuries, which currently rank as among the world’s safest investments.

“From a credit perspective, the negative effects on government finance are likely to outweigh the positive effects of higher economic growth,” Moody’s analyst Steven Hess said in a report sent late on Sunday.

After Obama announced his plan, Treasury prices fell sharply in volatile trade last week and yields have hit a six-month high, in part due to concerns over the effect the package will have on government debt levels.

If the bill becomes law, it will “adversely affect the federal government budget deficit and debt level,” Moody’s said.

Consequences people, consequences.

FILED UNDER: Quick Takes, Taxes, US Politics
Doug Mataconis
About Doug Mataconis
Doug holds a B.A. in Political Science from Rutgers University and J.D. from George Mason University School of Law. He joined the staff of OTB in May 2010 and contributed a staggering 16,483 posts before his retirement in January 2020.

Comments

  1. Paul L. says:

    Remind me how far ahead of the curve was Moody’s with Madoff and the Real Estate bubble?

  2. Dave Schuler says:

    What doesn’t seem to be mentioned other than obliquely is the increase in the cost of borrowing that would entail. It’s a serious consideration. We’re already spending more on debt service than we are on anything other than Medicare, Social Security, and defense.

  3. wr says:

    Why would anyone listen to these whores? They — and the other rating agencies — gave AAA ratings to securities they knew were essentially worthless because they were getting paid by the banks selling them. Without their stamp of approval, a lot of the CDS nonsense that’s bankrupted the world could never have happened.

    These people should be bankrupted, then jailed. Instead, we’re supposed to treat them as oracles, just as we’re required to worship the banksters who take home the billion dollar bonuses so they’ll consent to help out the economy a little.

  4. Dave Schuler says:

    Why would anyone listen to these whores?

    Maybe because they’re required to by law.

  5. John Personna says:

    I’ve mentioned the bond vigilantes a couple times. I’d look there for an early warning. Yes, the rating agencies lag, almost seeming to wait until all Wall Street knows already.

  6. wr says:

    Yes, the terrifying bond vigilantes, the all-purpose boogie man of those who seek to transfer the world’s wealth to the ultra-rich. Ireland has bankrupted itself and its citizenry in an attempt to please those all-powerful bond vigilantes — while making sure that none of the bankers responsible for the chaos are touched at all, just in case they happen to be pals of the BVs — and what’s happened? The bond vigilantes have punished them anyway, lowering their credit rating and causing yet more misery.

    It’s all a great scam. We must eliminate all social services, all help to the poor and middle class, and we must slash taxes for the super rich. Only then will the mysterious bond vigilantes love us again.

    Enough. It’s time to bring back government of the people, by the people, and for the people.

    There are riots in Greece and England and Italy as the citizens begin to realize that the politicians are in collusion with the bankers, and all are working only to protect the assets of the super-wealthy. It will happen here, too — although the moron Tea Partiers will continue to fight to make sure their own assets are given to the management of Goldman, Sachs because, you know, freedom.

  7. Alex Knapp says:

    Let me guess — the solution to this problem is to cut more taxes! After all, it will magically make revenues increase, right?

  8. john personna says:

    To me wr, the vigilantes are early warning and prevention of what otherwise would be much more common debt crises and currency collapse.

    The pols (and peoples) can’t be counted on themselves to balance revenue and spending. Better they get some constructive feedback than a full failure in bond offering.

    Technically also, the vigilantes are bond buyers acting rationally and NOT encouraging outrageous debt.

    What is really missing on the bubble blowing side of a credit cycle are vigilantes to say no.

    We didn’t have vigilantes buying mortgage backed securities. We had patsies.

  9. Tano says:

    I am all in with wr here. Why on earth is Moody’s still in business? Why haven’t they been liquidated, and all executives jailed for a really long time?

    Although there is plenty of blame to go around, one can make the case that Moody’s et al were the absolute worst, the absolute most corrupt and most responsible for the financial meltdown.

    Not only do they remain in business, but we are to cower in response to their pronouncements?

  10. john personna says:

    Tano, while I’d like to see some perps walk, I’m quite confident that bond buyers ignore ratings a great deal now. Especially “AAA” ratings (that really need “air quotes”).

    See also “How the Fed Became the Dealer of Last Resort ” as reported recently at Marginal Revolution.

    http://www.marginalrevolution.com/marginalrevolution/2010/12/the-new-lombard-street.html

  11. Herb says:

    How much you wanna bet this is going to show up in in a campaign ad in 2012? Mitt Romney, sitting there telling us how Barack Obama ruined the US’s credit rating and how as a business executive, he’s the man to repair it.

  12. JKB says:

    This is an easy fix. Slip a little cash to them under the table and voila!. They’ll let the junk be sliced and diced and out of the oven comes AAA. It’s just an extortion scam.