Moody’s and Fitch keep U.S. triple-A credit rating, but say outlook is negative
Two of the three major credit ratings companies affirmed their top ratings for the U.S., but warned that the government must do more to reduce the nation’s enormous debts.
Despite congressional approval to raise the debt ceiling, Moody’s Investor Services and Fitch Ratings said Tuesday that they still could downgrade the triple-A ratings if the nation’s fiscal situation worsens or needed spending cuts don’t take place.
More trouble could be looming. Standard & Poor’s Financial Services, which did not make any statement Tuesday, is seen as the credit rating agency most likely to issue an immediate downgrade.
The moves by Moody’s and Fitch were expected, given their earlier statements that a credit downgrade would be triggered only by a U.S. default.
The Senate approved legislation Tuesday to increase the $14.3-trillion debt limit hours before the deadline set weeks ago by the Treasury Department. President Obama quickly signed it, ensuring that the U.S. would be able to borrow again to pay billions of dollars in incoming bills and avoid default.
As of Monday, the Treasury had only about $69 billion in cash on hand.
The increase of at least $2.1 trillion in the debt ceiling meant the short-term risk of default remained “extremely low,” the standard for a triple-A rating, Fitch said minutes after the Senate voted.
“The fundamental economic and financial underpinning of the United States’ AAA status remains strong despite the heated political debate over the role of government and how best to reduce the outsized federal budget deficit,” the firm said.
The bipartisan deal after a weekend of harrowing negotiations showed that “despite the intensity and theater of political discourse in the United States, there is the political will and capacity to ultimately do the right thing,” Fitch said.
Fitch and Moody’s described the legislation as a first step toward the deep deficit reduction needed to maintain the nation’s triple-A rating.
Moreover, Moody’s changed its outlook for the nation’s credit rating Tuesday to negative, meaning that there was a risk of a downgrade. Fitch said it would determine by the end of August if it would do the same.
The complex, two-step spending-cut process approved by Congress is “untested,” Moody’s said. The legislation calls for an initial $917 billion in cuts over 10 years with automatic spending reductions of at least $1.2 trillion if a special committee doesn’t agree on deeper cuts.
“Attempts at fiscal rules in the past have not always stood the test of time,” Moody’s warned.
In addition, more cuts probably would be needed, in part because of the dramatic slowdown in economic growth in the first half of the year, the firm said.
If the economy continues to struggle, spending cuts will be more difficult to make, Moody’s said, and the cost of borrowing could rise over time, worsening the government’s financial situation.
Some analysts believe that S&P could downgrade its U.S. credit rating because the spending cuts in the deal fall short of the $4 trillion over the next 10 to 12 years that the firm had indicated were needed. But S&P backed off that threshold last week.
