US credit rating risks rising

Written by Reuters | New York | Updated: Jan 29 2011, 08:22am hrs
Moodys Investors Service warned on Thursday that lack of US government action on the budget deficit increases the likelihood of a negative outlook on the countrys top AAA credit rating.

The Moodys report, which came hours after a downgrade of Japan by Standard & Poors and an IMF warning on growing budget deficits in both countries, reiterated previous comments made by the agency late last year. The IMF said the G7s two biggest economies needed to spell out credible deficit-cutting plans before the markets lose patience and dump their bonds.

On Friday, Japans Prime Minister Naoto Kan vowed to push ahead with tax reforms aimed at curbing the countrys debt, but an uncooperative opposition and divisions within his own party on policy make the chances of success slim. The important thing is to maintain fiscal discipline and ensure market confidence in Japans public finances, Kan told parliaments upper house.

Moodys had said in December that the extension of Bush-era tax cuts would add to the likelihood of a negative outlook on the US rating in the next two years. Lower debt ratings typically push up a countrys borrowing costs. A negative outlook makes a rating downgrade more likely in the next 12 to 18 months.

In Thursdays report, Moodys provided more details about the risks to US ratings. It expressed concern about the new configuration of the US Congress, saying it may reduce the chances of an agreement to rein in the deficit. The Republicans won majority control of the US House of Representatives in the November elections, but the Democrats continue to hold the majority in the Senate.

Moodys also worried that Congress may fail to consider and pass into law some of the deficit-reducing measures proposed by the National Commission on Fiscal Responsibility and Reform, a panel mandated by President Barack Obama to find ways to tackle the deficit.

Recent trends in and the outlook for government financial metrics in particular indicate that the level of risk (to the US rating), while still small, is rising and likely to continue to rise in the next several years, Moodys said in the report.

Although no rating action is contemplated at this time, the time frame for possible future actions appears to be shortening, and the probability of assigning a negative outlook in the coming two years is rising, it added.

The purpose of the report was to provide more details on the agencys view on the US credit-worthiness and not to address any recent developments that could impact the ratings, Moodys analyst Steven Hess said.

For Moodys, the next piece of relevant information for US ratings will be the presentation of the federal budget next month because its going to show the proposals on the part of the administration on what to do to address the nations deficit problem, Hess said.

Prices for US treasuries were unmoved on the report, with benchmark 10-year notes remaining 6/32 higher on the day, yielding 3.39%. Long-term US rates are expected to rise toward 5% in the next three years but average less than that, Moodys said in the report. At those levels, the agency would remain comfortable with the US debt affordability, Hess said.