Moody's Could Downgrade U.S. Debt in 2013

Moody's Investors Service came out on Tuesday and said that it could downgrade the U.S. government's credit rating if long-term sustainable solutions are not produced to deal with the rising debt. In particular, Moody's said that if the Congress repeals looming spending cuts and tax increases which are set to begin next year, and does not replace them with measures designed to cut the deficit, the government would lose its AAA rating with Moody's. Heading into the November elections, little is being done on Capitol Hill to address the debt and continued deficits. Once the outcome is determined, however, there will be plenty of work to be done to avoid yet another embarrassing downgrade, this time from Moody's. The Wall Street Journal reports that on January 1, 2013, the previously negotiated spending cuts are set to kick in, and tax rates will rise on more than 100 million Americans. Clearly, given the continued precarious state of the economy, this could be worrisome, but there are no perfect solutions to getting a handle on the ballooning debt. This is particularly true if the economy continues to muddle along. According to the Journal, the government has run a $1 trillion deficit for four consecutive years now and total government debt reached $16 trillion last year, which is just shy of the current $16.394 trillion debt ceiling. The Moody's report said that negotiations on Capitol Hill should "lead to specific policies that produce stabilization and then downward trend in the ratio of federal debt" to the size of the economy "over the medium term." The Moody's report noted that while some sort of agreement may not be reached in the immediate aftermath of the election, a deal needed to be reached sometime next year. “The actions of policymakers in terms of long-term fiscal measures at the end of the year or in early 2013 will be important determinants of how we deal with the rating outlook,” Moody's said. Including reform of entitlement programs would add to the long-term stability of any fiscal plan.” The warning from Moody's comes more than a year after Standard & Poor's lowered the U.S.'s AAA credit rating. Currently, there is little consensus within the government about how to go about making the necessary policy changes to address the out-of-control fiscal situation, although both Republicans and Democrats at least appear to comprehend the seriousness of the situation. When it comes down to making the tough decisions, however, there is little indication of a way forward at this point that both parties can agree upon.