Two of the major credit ratings services have given mixed reviews to the fiscal package that Congress devised this week to avert a fiscal crisis, and said the agreement would not change their negative outlook for America’s sovereign debt.
Moody’s Investors Service said on Wednesday that the package did not “provide a basis for a meaningful improvement in the government’s debt ratios,” one of the main things Moody’s analysts need to see for their outlook on the United States’ debt to improve. The debt ratios would not change appreciably because the fresh revenue to be gained from the higher tax rate on wealthy households would be eclipsed by the revenue forgone by keeping the current tax rates in place for everyone else, Moody’s said in a brief report.
Moody’s and Standard & Poor’s both said on Wednesday that the new fiscal package had bought Congress about two months’ time before it would have to enact big cuts in federal spending — as much as $1.2 trillion worth over 10 years. The two-month delay means the next round of high-pressure Congressional negotiations is likely to coincide with the next deadline to raise the federal debt ceiling, which will come in late February or early March.
“Although Moody’s believes that the debt limit will eventually be raised, and that the risk of default on Treasury bonds is extremely low, this confluence of events adds uncertainty to the outcome,” Steven A. Hess, a member of Moody’s sovereign risk group, wrote in the report. “The debt trajectory resulting from this process is likely to determine whether the AAA rating is returned to a stable outlook or downgraded.”
Standard & Poor’s said the agreement might bolster “the still-fragile U.S. economic rebound,” but “does little to place the U.S.’s medium-term public finances on a more sustainable footing.” It also said the continuing uncertainty put the creditworthiness of America’s states and cities under “a fiscal cloud,” because many states rely on capital gains taxes, and the fighting in Washington could roil the stock market. Moody’s said that the deal helped America dodge a recession for the time being, but that the increase in the Social Security payroll tax, along with additional spending cuts expected in the coming months, were likely to dampen economic growth.
The third major ratings agency, Fitch, did not issue a statement in response to the fiscal agreement, but a spokesman said the observations Fitch had made in December still applied. Fitch said in a report on Dec. 19 that it expected Congress to find a way to pull back from the “fiscal cliff,” but that it would not be “a credible plan to reduce the federal budget deficit and stabilize government debt over the medium term.”
The three agencies already have a negative outlook on the United States’ sovereign debt, suggesting that a downgrade is possible at some point. Standard & Poor’s is the only agency ever to downgrade the United States Treasury’s credit, which it did in August 2011 by one notch to AA-plus, when Congress nearly failed to increase the government’s borrowing authority in time to avert a cash crunch. Moody’s and Fitch kept their ratings at the highest possible, Triple-A.
The three agencies said that while they were looking at quantitative ratios, like the relationship between the federal debt and gross domestic product, they were also considering federal policy makers’ ability to negotiate productively despite their fundamental differences.
Fitch said it was watching for a credible deficit reduction plan, with “specific measures and targets” and “a significant down payment in 2013.”
Standard & Poor’s noted that Republicans in Congress “have indicated they will demand more spending cuts, while the White House has hinted at a harder line than it took in 2011, when political brinkmanship nudged the country toward default on its debt.” Brinkmanship and the brush with default were what prompted the agency’s unprecedented downgrade in 2011.
A credit downgrade normally makes it more expensive for an institution to borrow, but that did not happen after Standard & Poor’s action. Global investors have kept on flocking to Treasuries, and the federal government’s borrowing rate is now around 1.8 percent, compared with a rate above 2.5 percent around the time of the downgrade.