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Moody's Signals Risk of Negative Outlook for U.S. Rating

Moody’s Investors Service said its time frame for possibly placing a negative outlook on the Aaa rating of U.S. Treasury bonds is shortening as the country’s deficit widens.

The outcome of the November elections, the extension of tax cuts and the chance that Congress will not address deficit reduction have increased Moody’s uncertainty over the willingness and ability of the U.S. to reduce its debt, the credit-ratings company said today in a report.

“Although no rating action is contemplated at this time, the time frame for possible future actions appears to be shortening, and the probability of assigning a negative outlook in the coming two years is rising,” wrote Steven Hess, a senior credit officer in New York and the author of the report. The rating remains stable, according to the report.

“Because of the financial crisis and events following the financial crisis, the trajectory is worse than it was before,” Hess said in a telephone interview.

Moody’s said it expected there would be “constructive efforts” to reduce the budget deficit and control entitlement spending. It predicted long-term Treasury yields would rise toward 5 percent without surpassing that level.

The amount of marketable U.S. debt outstanding increased by 22 percent to $8.86 trillion in 2010.

Highest Debt Ratio

Spending to address the financial crisis and its fallout, including assistance to financial institutions, caused a sharp increase in the U.S. deficit and “shortened the horizon for possible rating change,” Moody’s said. U.S. debt ratios are high, compared with other top-rated nations, Moody’s said.

“In addition, the other large Aaa countries have plans to reduce deficits substantially over the coming few years, indicating that this trend may continue,” Hess said.

The U.S. has the highest ratio of government debt to revenue of any Aaa rated country, Moody’s said. The ratio, at 426 percent, is more than double that of Germany, France and the U.K. and more than four times higher than Australia, Sweden and Denmark, according to Moody’s.

Earlier today, Standard & Poor’s cut Japan’s credit rating for the first time in nine years, lowering it to AA- from AA. The company said persistent deflation and political gridlock were undermining efforts to reduce a 943 trillion yen ($11 trillion) debt burden.

The ratings firms also have reduced Europe’s so-called peripheral countries on rising deficits and slumping growth.

Greece, Portugal, Spain

Fitch Ratings cut Greece to BB+ on Jan. 14, following S&P and Moody’s in lowering the country to junk status. Moody’s began reviewing Portugal and Spain in December.

Credit-default swaps on U.S. Treasuries climbed for a fourth consecutive day, rising 1.5 basis points to 51.57 basis points, according to data provider CMA. That means it would cost the equivalent of $51,570 a year to protect $10 million of debt against default for five years.

That compares with 59.8 basis points for debt issued by Germany, 83.1 for Japan, and 897.3 for Greek bonds, the data show.

The U.S. Treasury Department said today it will reduce its borrowing on behalf of the Federal Reserve to $5 billion from $200 billion because of concerns about the federal debt limit. The administration of President Barack Obama and Congress are debating whether to raise the limit as the government approaches the current ceiling of $14.29 trillion, which the Treasury estimates will be reached between March 31 and May 16.

Focus on the debt ceiling, which was increased a year ago, has risen since Republicans won control of the House of Representatives in November with pledges to challenge the Obama administration on spending. GOP lawmakers have told the president and Democratic legislators that they will insist on specific cuts as a condition of raising the U.S. debt limit.

To contact the reporter on this story: Christine Richard in New York at crichard5@bloomberg.net

To contact the editor responsible for this story: Alan Goldstein at agoldstein5@bloomberg.net

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