If the budget talks in Congress fail to reach a deficit reduction deal, Moody’s could very well join rival Standard & Poor’s in taking away America’s prized triple A credit rating. Moody's said that if Congress gets rid of planned spending cuts and tax increases set to take effect next year and doesn’t institute deficit-reduction measures, the United States would lose the top-notch rating, reports the Wall Street Journal.
Moody’s currently gives the United States the top Aaa credit rating, but with a negative outlook. If negotiations in Congress fail to produce “a stabilization and then downward trend in the ratio of federal debt to GDP over the medium term” the agency would likely lower the rating to Aa1, reports Reuters. The warning provides additional pressure to lawmakers because it seems to make clear that it won’t be enough to avert the infamous “fiscal cliff,” but rather lawmakers have to come up with a broad agreement to decrease debt, points out the Financial Times.
Coming at a time when Washington is concentrated on the November elections, Moody’s was careful to note that it would want to see a substantive deal next year, an apparent recognition that not much might get done right after the election. This isn’t the first time Moody’s has issued a warning on U.S. debt. In fact, Moody’s put the rating under review with a negative outlook in August 2011.
And while the warning might be dramatic, predicting the consequences of a rating change “may be little different from flipping a coin,” points out Bloomberg. Almost half the time, yields end up falling when a rating suggests they should increase, or vice versa.