Moody's Backs Down: US Remains AAA

Moody’s backed away from a decision that could have haunted the credit rating agency for years. It affirmed the Aaa credit rating of the United States, a move many believed would not happen. The budget deal passed by Congress did too little, too late to solve long-term US debt problems, a number of economists said

In its announcement, the firm wrote

Moody’s Investors Service has confirmed the Aaa government bond rating of the United States following the raising of the statutory debt limit on August 2. The rating outlook is now negative.

Moody’s placed the rating on review for possible downgrade on July 13 due to the small but rising probability of a default on the government’s debt obligations because of a failure to increase the debt limit. The initial increase of the debt limit by $900 billion and the commitment to raise it by a further $1.2-1.5 trillion by yearend have virtually eliminated the risk of such a default, prompting the confirmation of the rating at Aaa.

In confirming the Aaa rating, Moody’s also recognized that today’s agreement is a first step toward achieving the long-term fiscal consolidation needed to maintain the US government debt metrics within Aaa parameters over the long run. The legislation calls for $917 billion in specific spending cuts over the next decade and established a congressional committee charged with making recommendations for achieving a further $1.5 trillion in deficit reduction over the same time period. In the absence of the committee reaching an agreement, automatic spending cuts of $1.2 trillion would become effective.

Moody’s might just as well have justifiably done otherwise and cut the rating to Aa. The three credit agencies threatened to cut the US grade if Congress and the Administration did not avoid a sovereign default. Each went a step further than that and claimed that the government needed to put solutions into any legislation that would prevent a significant deepening of US obligations because of overspending. Deficits from that spending would raise the national debt to unsustainable levels over the next decade. Moody’s appears to have reversed its field. Perhaps the agency was not willing to set off a string of events that might raise interest rates around the world if it lowered the US to an Aa level and this made it more difficult for the Treasury to raise money.

The economy has signaled it is in much more trouble than was thought just a month ago. The credit rating agencies have not taken that into account adequately if the Moody’s document is an indication.

Douglas A. McIntyre