Moody’s Investors Service Tuesday repeated a threat to downgrade the United States’ sovereign debt rating.
Moody’s has had a negative outlook on its Aaa rating of U.S. sovereign debt since Aug. 2, 2011.
In December 2011 Moody’s issued a report on how a downgrade of the U.S. rating would affect the nation’s municipal ratings. It concluded that it would lead to the downgrade of three states: Maryland, Virginia and New Mexico. It also concluded that Moody’s would downgrade 36 local governments, many of them in the vicinity of Washington, D.C.
“Based upon the actions taken by the U.S. government to address its structural budget deficit, issuers in the U.S. municipal market at all rating levels may become more fiscally strained,” Moody’s wrote in the December 2011 report.
The outcome of federal budget negotiations during the 2013 Congressional session will likely determine the rating’s future, Moody’s stated Tuesday. The agency said that it thought maintaining the outlook into 2014 was unlikely.
Instead, Moody’s expects in 2013 to either remove the negative outlook or downgrade the rating, probably to Aa1. It expects to maintain the Aaa rating with a negative outlook “until the outcome of [2013 congressional budgetary] negotiations becomes clear.”
Moody’s expects that the U.S. government will raise the federal debt limit when it is reached near the end of 2012. If the government does not do this, for a few months the government could meet interest and other expenses from available resources before running out of resources. If Washington did not raise the debt limit when it was reached, Moody’s said it would likely place the government on a review for a downgrade a few weeks later.
Standard & Poor’s downgraded the U.S. government to AA-plus from AAA on Aug. 5, 2011. As a result, S&P downgraded about 11,000 municipal securities connected to the U.S. government. The credits were overwhelmingly in the housing sector, according to S&P spokesman Olayinka Fadahunsi.