The U.S. government's debt rating could be headingfor the "fiscal cliff" along with the federal budget.
Moody's Investors Service on Tuesday said it would likelycut its "Aaa" rating on U.S. government debt, probably by one notch,if budget negotiations fail.
If Congress and the White House don't reach a budget deal,about $1.2 trillion in spending cuts and tax increases will automatically kickin starting Jan. 2, a scenario that's been dubbed the "fiscal cliff,"because it is likely to send the economy back into recession and drive upunemployment.
A year ago, Moody's cut its outlook on U.S. debt to"negative," which acts as a warning that it might downgrade therating, after partisan wrangling over raising the U.S. debt limit led the nationto the brink of default.
Rival agency Standard & Poor's took the drastic step ofstripping the government of its "AAA" rating on its bonds on Aug. 5,2011. Fitch Ratings issued a warning of a potential downgrade.
In its report Tuesday, Moody's said it is difficult topredict when Congress will reach a deal on the budget, and it will likely keepits current rating and "negative" outlook until the outcome of thetalks is clear.
In Washington, Moody's action didn't spur the politiciansresponsible for making a deal to sit down at the table.
House Speaker John Boehner, a Republican, said he's notconfident that Congress can reach a deal and avoid a downgrade. No seriousnegotiations are expected until after the November elections.
Boehner's Democratic counterpart in the Senate, MajorityLeader Harry Reid, was far more hopeful that "some kind of agreement"would be reached after the elections. Reid suggested that the results of theelection will weaken the Republican Party's resolve to block tax increases onwealthier earners and that Republicans will be more willing to compromise.
Moody's also noted that the government will likely againreach the debt limit by the end of the year, which means another round ofnegotiations in Congress on raising the limit if the U.S. is to keep paying itsbills.
"Under these circumstances, the government's ratingwould likely be placed under review after the debt limit is reached, butseveral weeks before the exhaustion of the Treasury's resources," Moody'sanalyst Steven A. Hess said in his report.
Despite the rating cut last year from S&P and thewarnings from Moody's and Fitch, the U.S. has been able to continue borrowingat very low rates. That's because investors are still buying U.S. governmentbonds, as economic turmoil in Europe and uncertainty in other parts of theglobe have left U.S. debt and U.S. dollars looking like safe bets. In contrast,bond investors demand high rates from troubled countries like Spain and Italy.
The stock markets plunged when the downgrade occurred inAugust 2011. The Dow Jones industrial average lost 634 points on the firsttrading day after S&P's announcement. But Moody's warning on Tuesday didlittle to ruffle traders. The Dow average rose 69 points to close at 13,323.
Rep. Barney Frank, the top Democrat on the House FinancialServices Committee, called the Moody's action "nonsense."
There's no risk of the U.S. defaulting on its debtobligations, Frank said in a telephone interview. He noted that S&P'sdowngrade last year didn't result in higher interest rates for the government.