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Summary The U.S. government's debt rating could be heading for the fiscal cliff along with federal budget.
Moodys 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 dont reach a budget deal, about $1.2 trillion in spending cuts and tax increases will automatically kick in starting Jan. 2, a scenario thats been dubbed the fiscal cliff, because it is likely to send the economy back into recession and drive up unemployment.A year ago, Moodys 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 & Poors 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, Moodys 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, Moodys action didnt spur the politicians responsible for making a deal to sit down at the table. House Speaker John Boehner, a Republican, said hes not confident that Congress can reach a deal and avoid a downgrade. No serious negotiations are expected until after the November elections.Boehners 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 Republican Partys resolve to block tax increases on wealthier earners and that Republicans will be more willing to compromise.Moodys 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.Under these circumstances, the governments rating would likely be placed under review after the debt limit is reached, but several weeks before the exhaustion of the Treasurys resources, Moodys analyst Steven A. Hess said in his report.Despite the rating cut last year from S&P and the warnings from Moodys and Fitch, the U.S. has been able to continue borrowing at very low rates. Thats because investors are still buying U.S. government bonds, as economic turmoil in Europe and uncertainty in other parts of the globe have left U.S. debt and U.S. dollars looking like safe bets. In contrast, bond investors demand high rates from troubled countries like Spain and Italy.The stock markets plunged when the downgrade occurred in August 2011. The Dow Jones industrial average lost 634 points on the first trading day after S&Ps announcement. But Moodys warning on Tuesday did little to ruffle traders. The Dow average rose 69 points to close at 13,323.Rep. Barney Frank, the top Democrat on the House Financial Services Committee, called the Moodys action nonsense. Theres no risk of the U.S. defaulting on its debt obligations, Frank said in a telephone interview. He noted that S&Ps downgrade last year didnt result in higher interest rates for the government.
