Moody’s warned yesterday it could strip the US of its coveted triple-A credit rating if Congress fails to produce a budget that will bring down the federal debt burden.
“Budget negotiations during the 2013 Congressional legislative session will likely determine the direction of the US government’s Aaa rating and negative outlook,” the ratings firm said.
If the negotiations lead to specific policies that produce a stabilisation and then downward trend in the ratio of federal debt to GDP over the medium term, the rating will likely be affirmed and the outlook returned to stable, it said.
“If those negotiations fail to produce such policies, however, Moody’s would expect to lower the rating, probably to Aa1.”
Moody’s said it was unlikely it would keep the Aaa rating with a negative outlook into 2014.
“The only scenario that would likely lead to its temporary maintenance would be if the method adopted to achieve debt stabilisation involved a large, immediate fiscal shock — such as would occur if the so-called ‘fiscal cliff’ actually materialised — which could lead to instability,” it said.
The fiscal cliff — a mandated mixture of spending cuts and tax hikes — is set to occur at the beginning of 2013, unless bitterly divided lawmakers can find a way to avoid it.
Moody’s said if the fiscal cliff happened, to would need evidence “that the economy could rebound from the shock before it would consider returning to a stable outlook.”
Meanwhile, in another bit of negative news for the economy, the US trade deficit grew slightly in July, as exports to Germany, France and other European nations shrank and imports from China soared to a new record.
The monthly trade shortfall was $42bn, compared to a downwardly revised estimate of $41.9bn for June, as both overall imports and exports declined.
But analysts surveyed before the report had expected a bigger trade deficit of around $44bn.
The ongoing debt crisis in Europe appeared to be taking a toll on demand, with US exports to the 27 nations of the European Union falling 11.7% in July.
The US economy grew at just a 1.7% annual rate in the second quarter of this year. Growth in the third quarter is expected to show improvement, but the jobless rate remains stubbornly high at over 8%.
The Federal Reserve’s policy-setting group meets today and tomorrow and many analysts believe it may launch a third round of bond buying to keep borrowing costs low and breathe more life into the recovery.
The high jobless rate and spotty recovery also is seen as a hurdle to President Barack Obama’s re-election bid, though the latest opinion surveys give Obama an edge over his Republican challenger Mitt Romney as the November polls approach.
Separate data yesterday showed US small business sentiment rose in August for the first time in four months as more owners anticipated better business conditions after the November 6 elections and increased sales.
From gulf times.