Moody's Waits on Budget Deal

said yesterday it may downgrade US government debt as has Standard and Poors if negotiations on debt reduction in Washington aren't successful. Should negotiations lead to policies that stabilize then reduce federal debt to GDP, the rating will likely stay as it is. If those negotiations fail, Moody's would likely lower the rating to Aa1. Moody's notes that it is difficult to predict if or when the next Congress will produce a budget package that retrains debt. The Aaa rating is likely to be maintained until the outcome of those negotiations becomes clear. The rating came with a negative outlook in August 2011, when the President and the Congress failed to reach agreement on a debt package and raised the debt ceiling after months of political brinksmanship. S&P cut its rating to AA+ that month, blaming the nation's political process. Treasuries rallied as investors ignored the S&P reduction, with the yield on the benchmark 10-year note dropping to record lows. Soon after the Moody's statement, the U.S auctioned $32 billion of three-year notes which drew record demand. The Obama administration's February budget, updated in August, would result in a debt-to-GDP ratio of 75 percent in 2022, Moody's said. While the S&P rating cut was based in part on its view of the U.S. political process, Moody's said it is waiting to see what happens in the next Congress. The budget deficit will reach $1.1 trillion this year, according to the Congressional Budget Office, down from last year's $1.3 trillion. Tax revenues have risen by almost 6% and spending is down by about 1% to modestly reduce the deficit. The Aaa rating with negative outlook would be extended beyond 2013 if a fiscal cliff actually materialized Moody's said. It would need proof that the economy could sustain the shock before it would consider the situation stabile.