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Global Credit Research - 02 Aug 2011
New York, August 02, 2011 -- Moody's Investors Service has confirmed the Aaa government bond
rating of the United States following the raising of the statutory debt
limit on August 2. The rating outlook is now negative.
Moody's placed the rating on review for possible downgrade on July
13 due to the small but rising probability of a default on the government's
debt obligations because of a failure to increase the debt limit.
The initial increase of the debt limit by $900 billion and the
commitment to raise it by a further $1.2-1.5
trillion by yearend have virtually eliminated the risk of such a default,
prompting the confirmation of the rating at Aaa.
In confirming the Aaa rating, Moody's also recognized that
today's agreement is a first step toward achieving the long-term
fiscal consolidation needed to maintain the US government debt metrics
within Aaa parameters over the long run. The legislation calls
for $917 billion in specific spending cuts over the next decade
and established a congressional committee charged with making recommendations
for achieving a further $1.5 trillion in deficit reduction
over the same time period. In the absence of the committee reaching
an agreement, automatic spending cuts of $1.2 trillion
would become effective.
In assigning a negative outlook to the rating, Moody's indicated,
however, that there would be a risk of downgrade if (1) there is
a weakening in fiscal discipline in the coming year; (2) further
fiscal consolidation measures are not adopted in 2013; (3) the economic
outlook deteriorates significantly; or (4) there is an appreciable
rise in the US government's funding costs over and above what is
First, while the combination of the congressional committee process
and automatic triggers provides a mechanism to induce fiscal discipline,
this framework is untested. Attempts at fiscal rules in the past
have not always stood the test of time. Therefore, should
the new mechanism put in place by the Budget Control Act prove ineffective,
this could affect the rating negatively. Moody's baseline
scenario assumes that fiscal discipline is maintained in 2012, despite
pressures for fiscal relaxation that often precede general elections and
the difficult negotiations that are likely to arise due to the scheduled
expiration of the so-called "Bush tax cuts" at the
end of that year.
Second, further measures will likely be required to ensure that
the long-run fiscal trajectory remains compatible with a Aaa rating.
Specifically, Moody's expects to see a stabilization of the
federal government's debt-to-GDP ratio not too far
above its projected 2012 level of 73% by the middle of the decade,
followed by a decline. Such a pattern would also support a smaller
interest burden as a percentage of government revenues than is now projected.
Wide political differences that have characterized the recent debt and
fiscal debate, if they continue, could prevent effective policymaking
around that time. Measures that further reduce long-term
deficits would be positive for the rating; a lack of such measures
would be negative.
Third, recent downward revisions of economic growth rates and the
very low growth rate recorded in the first half of 2011 call into question
the strength of potential growth in the coming year or two. Continued
very low growth would make fiscal consolidation more difficult.
As a result, Moody's will also be monitoring the pace of growth
as it relates to the fiscal effort.
Finally, the US Treasury's cost of borrowing has remained
low despite the recent political uncertainties surrounding the debt limit
and the long-term fiscal outlook. While Moody's and
economic forecasters generally expect interest rates to rise over the
next few years, a rise in borrowing costs above and beyond what
is now expected would threaten efforts at fiscal consolidation.
Such a development would also be negative for the rating should it occur.
Moody's has also confirmed the Aaa ratings of certain US government-guaranteed
bonds issued by the governments of Israel and Egypt, which had been
on review for possible downgrade as a result of the review of the US government's
The implications of this rating action for directly and indirectly related
ratings will be reported presently through a separate press release.
Moody's previously discussed the review of the US government's rating
and directly related credits in multiple documents that can be found on:
For a complete list of affected securities and additional analysis,
please visit: www.moodys.com/USRatingActions.
Please see the rating methodologies tab on the Credit Policy page on moodys.com
for the relevant methodology for each action.
Please see the ratings tab on the issuer / entity page on moodys.com
for the last Credit Rating Action and the rating history
Steven A. Hess
VP - Senior Credit Officer
Sovereign Risk Group
Moody's Investors Service, Inc.
MD - Sovereign Risk
Sovereign Risk Group
Moody's Investors Service, Inc.
Moody's Investors Service, Inc.
Moody's confirms US Aaa Rating, assigns negative outlook
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New York, NY 10007
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