U.S. Debt-Rating Change Not Dependent on Supercommittee Deal, Moody’s Says

A failure by a congressional supercommittee to reach agreement on deficit reduction wouldn’t on its own cause the U.S. to lose its top credit ranking, Moody’s Investors Service said.

While the failure “would be more negative,” the lack of an agreement isn’t decisive in the U.S.’s Aaa rating because the government’s August agreement to reduce the deficit includes $1.2 trillion in automatic cuts to discretionary spending that would begin in January 2013, Moody’s said today in a statement.

Since August, when Moody’s affirmed its U.S. rating, the New York-based firm’s outlook has been negative. A negative outlook is usually removed or leads to a rating change in about 12 to 18 months, though changes to the credit grade and outlook may happen outside that range, Hess said. The bipartisan committee held a hearing today on previous debt proposals.

“That’s not to say that the outcome is completely irrelevant,” Steven Hess, senior credit officer at Moody’s in New York, said today in a telephone interview. “All I’m saying is that it would not by itself lead to a downgrade of the rating. We would view an agreement by the committee and subsequent passage as a positive.”

The supercommittee is to vote on measures to reduce U.S. debt by $1.5 trillion on Nov. 23. At least $1.2 trillion in debt reductions must be enacted by Jan. 15 to avoid the automatic cuts.

‘Very Unlikely’

“If they leave it to the trigger, we would view that in a negative way, but it wouldn’t have a rating implication immediately,” Hess said. “It would indicate that between now and a national election next November, the likelihood of major reforms to reduce the deficit would be very unlikely.”

Arizona Senator John McCain, a Republican, has said the provision for automatic across-the-board spending cuts could be removed.

“If they undo the Budget Control Act, that would be a negative,” Hess said. “We’re not expecting that.”

Erskine Bowles, a co-leader of President Barack Obama’s fiscal commission, today told the congressional supercommittee, “I’m worried you’re going to fail.”

Bowles, a former Clinton Administration White House chief of staff, said the deficit stems from four major sources: the costs of health care and national defense, the “ineffective” tax system and interest on the national debt.

Debt Ceiling

“I believe if you all go big, if you’re bold and you do it in a smart manner, that the American people will support you” in cutting the deficit, he told the supercommittee.

Lawmakers agreed on Aug. 2 to raise the nation’s $14.3 trillion debt ceiling and put in place a plan to enforce $2.4 trillion in spending reductions over the next 10 years.

The U.S. lost its AAA ranking by Standard & Poor’s for the first time on Aug. 5. The rating firm cited the political failure to reduce record deficits and weakening “effectiveness, stability and predictability of American policy making and political institutions.”

America has an AAA ranking from Fitch Ratings with a stable outlook. A failure by the supercommittee to agree on at least $1.2 trillion of cuts would “likely result in negative rating action,” which carries a more than 50 percent chance of downgrade during the next two years, Fitch said Aug. 16 in a statement.

Instead of eroding the value of U.S. government debt, investors sought Treasuries and the world’s reserve currency after the S&P rating cut sparked financial market turmoil. Treasuries gained 6.4 percent last quarter, their best performance since the last three-months of 2008, according to Bank of America Merrill Lynch index data.

To contact the reporter on this story: John Detrixhe in New York at jdetrixhe1@bloomberg.net

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

Bloomberg reserves the right to remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.