Moody's Says Risk of Negative Outlook for U.S. Debt Remains With Deficits

Moody’s Investors Service said the risk of a negative outlook on its Aaa rating for U.S. debt remains unless lawmakers do more to address record budget deficits and spending.

President Barack Obama sent Congress a $3.7 trillion budget today that projects the federal deficit will exceed $1 trillion for the fourth consecutive year in 2012 before falling to more “sustainable” levels by the middle of the decade. The deficit for the current fiscal year is forecast to hit a record $1.6 trillion -- 10.9 percent of gross domestic product -- up from the $1.4 trillion the administration previously estimated.

“If the budget were adopted as presented, we would view this as a marginal positive,” said Steven Hess, a senior credit officer at Moody’s in New York. “But the likelihood of it being adopted as presented is extremely low. In the next couple of years if nothing more is done, the probability that the rating would be negatively affected is still there and this hasn’t changed that position.”

The probability of assigning a negative outlook in the next two years to the U.S. rating is rising as the deficit widens after the Obama administration and Congress agreed to tax cuts, Moody’s said in a statement last month while maintaining a stable outlook. Standard & Poor’s maintains an AAA rating on U.S. securities.

Obama’s budget plan would reduce federal shortfalls by $1.1 trillion over a decade through spending cuts in areas ranging from heating subsidies for the poor to grants for airports and water-treatment plants and revenue increases, including letting taxes rise for married couples with more than $250,000 in annual income.

Entitlement Programs

“We don’t think there’ll be any action on this soon, and when there’s action, it may look significantly different than what’s proposed here,” Hess said, adding that the budget doesn’t adequately address entitlements, which make up a large part of the budget.

The budget forecasts the deficit will be $627 billion in 2017, or 3 percent of gross domestic product, a level the administration said is sustainable. The shortfall would grow in subsequent years, reflecting the impact of Baby Boomers qualifying for Social Security and Medicare.

“It’s a step in the right direction,” David Wyss, chief economist at Standard & Poor’s in New York, said in an interview. “The deficit has been ridiculously large for an extended period of time and it needs to be cut. It’s not enough, but it’s a significant move. The U.S. needs to do something in order to retain that rating.”

-- With assistance from Roger Runningen and Brian Faler in Washington. Editors: Dave Liedtka, Paul Cox

To contact the reporter on this story: Susanne Walker in New York at swalker33@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net

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