U.S. Needs Lower Deficits to Avoid Downgrade, Moody’s Says

The U.S. budget package passed by Congress won’t reduce deficits enough to avoid a sovereign- rating downgrade, according to Moody’s Investors Service.

The ratio of government debt to gross domestic product will likely peak at about 80 percent in 2014 and may stay at about that level for the rest of the decade, New York-based Moody’s said today in a statement. The ratings company assigns the U.S. its top Aaa ranking and has a negative outlook on the grade, as does Fitch Ratings. Standard & Poor’s cut the U.S. rating one step to AA+ on Aug. 5, 2011, with a negative outlook.

“Stabilization at this level would leave the government less able to deal with future pressures from entitlement spending or from unforeseen shocks,” Moody’s said. “Further measures that bring about a downward debt trajectory over the medium term are likely to be needed.”

The legislation passed by Congress averts income-tax increases for most Americans while taxing top-earners more, yet leaves unanswered longer-term questions for taming the federal debt. Republicans are planning to use the need to raise the nation’s $16.4 trillion debt ceiling to try to force President Barack Obama to accept cuts in entitlement programs, such as Medicare. Congress must act as early as mid-February to prevent a default.

“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 of negotiations,” the ratings company said. “The debt trajectory resulting from this process is likely to determine whether the Aaa rating is returned to a stable outlook or downgraded.”

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

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