WASHINGTON — The creditworthiness of the U.S. federal government hinges on the outcome of budget negotiations in 2013 between the newly re-elected Barack Obama and the still divided Congress, a new report said.
Moody’s Investors Services warned in a 44-page report on Monday that they will downgrade the U.S. government to Aa1 from Aaa negative if budget negotiations fail to produce policies that “lead to debt stabilization and ultimately reduction.”
Congress returns to a lame duck session in Washington today after a six-week recess and is likely headed towards a collision course with Obama over a host of issues including the so-called “fiscal cliff” and the debt ceiling.
The fiscal cliff includes $600 billion in tax increases and $1 trillion in automatic, across-the-board cuts slated to go into effect in January 2013.
“The political landscape remains highly polarized and unpredictable,” Moody’s said in the report. “Despite the clarity gained from the election outcome, it remains difficult to predict when Congress will conclude negotiations that result in the passage of a budget package that either avoids or remedies the deleterious economic effects of the imminent fiscal shock.”
If Congress and president Obama adopt a strategy on the fiscal cliff that achieved debt stabilization — involving a large, immediate fiscal shock that would improve government finances in the short term but likely result in a recession and higher unemployment — Moody’s would maintain its Aaa rating with a negative outlook and wait for evidence that the economy could rebound before considering a return to a stable outlook.
Late last week, the nonpartisan Congressional Budget Office published a report that warned failure to avoid the fiscal cliff could trigger a recession in the U.S. next year and cause the unemployment rate to rise to 9.1%.
Moody’s predicts that it is increasingly likely that action on the federal budget will be punted and won’t occur until sometime in 2013. In the meantime, it’s likely lawmakers will pass a series of temporary measures.
“Such deferment, if not accompanied by an apparent commitment to achieving agreement and a credible timetable for implementing the necessary reforms to preserve sovereign creditworthiness, would be inconsistent with maintaining a Aaa rating,” Moody’s said.
President Obama has invited congressional leaders of both parties to the White House this week to begin negotiations on the looming tax increases and budget cuts. On Friday, the president demanded that tax rates for those families earning more than $250,000 should be allowed to increase.
Republicans oppose any tax increases and insist that revenue can be raised through cutting federal spending.