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BW Businessworld

Moody's Confirms U.S. Rating At AAA, Outlook Negative

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Moody's Investors Service on Tuesday confirmed its AAA rating of the United States, citing the decision to raise the debt limit, but assigned a negative outlook to the rating, putting pressure on lawmakers to create a long-term fiscal consolidation plan.

Moody's negative outlook is a sign that a downgrade is still possible in the next 12 to 18 months.

The ratings agency affirmed the United States' AAA rating after Congress agreed to raise the country's debt ceiling, which will allow the Treasury to keep servicing U.S. debt obligations.

Possible Downgrade
Moody's had placed U.S. ratings on review for a possible downgrade on July 13, fearing that the government could miss debt payments if lawmakers failed to increase the country's legal borrowing limit by early August.

"Today's agreement is a first step toward achieving the long-term fiscal consolidation needed to maintain the U.S. government debt metrics within Aaa parameters over the long run," Moody's said in a statement.

With the debt ceiling issue resolved, the agency said it is focusing on the long-term challenges to U.S. public finances, burdened by a deficit that has reached about 9 per cent of the country's economy - close to the highest since World War II.

Moody's said that while the combination of the law's congressional committee process and automatic triggers provides a mechanism to induce fiscal discipline, this framework is untested.

"They are simply saying they are waiting to see what develops with the new deficit budget commission. It is certainly reasonable given the U.S.'s fiscal position," said John Silvia, chief economist at Wells Fargo Securities in Charlotte, North Carolina. "Now that we are past the deficit issue, the fiscal issues over the long run will be the story."

The U.S. Senate on Tuesday approved the $2.1 trillion deficit-reduction plan by a 74 to 26 vote and President Obama signed it into law.

The law lifts the debt ceiling enough to last beyond the November 2012 elections, calls for $2.1 trillion in spending cuts spread over 10 years and creates a bipartisan joint House and Senate committee to recommend a deficit-reduction package by late November. It does not include any tax increases.