Moody’s threatens downgrade of U.S. credit rating

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An impasse in Congress over the national debt has for the second time this year gained negative attention from major credit agencies.

After congressional leaders refused to make a quick deal regarding the national debt ceiling and Bush-era tax cuts on Tuesday, Moody’s Investor Service warned lawmakers that it would downgrade the United States’ AAA rating if they couldn’t come to an agreement, according to The New York Times.

The Moody’s warning comes a year after Standard & Poor’s downgraded the United States’ creditworthiness after a stalemate between Republicans and Democrats over raising the nation’s statutory borrowing limit.

Like S&P, Moody’s emphasized political dysfunction more than soaring government debt. The agency said Washington must come to an agreement to head off billions of dollars in simultaneous tax increases and spending cuts scheduled to begin in January and to put the government on a sustainable fiscal trajectory. Only then would the United States keep its AAA rating.

“If those negotiations lead to specific policies that produce a stabilization and then downward trend in the ratio of federal debt to GDP over the medium term, the rating will likely be affirmed and the outlook returned to stable,” Moody’s said in a statement. “If those negotiations fail to produce such policies, however, Moody’s would expect to lower the rating.”

If no agreement is reached, all of the Bush-era tax cuts will expire in January, just as more than $1 trillion in automatic military and domestic cuts begin slicing spending. Numerous economists have warned that the hit to the economy will almost surely send the nation back into a recession.

Click here for the full report.

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