NEW YORK — Moody’s Investors Service said the U.S. credit rating may be downgraded for the first time on concern that fiscal discipline may erode, further debt-reduction measures won’t be adopted and the economy may weaken.
The nation, rated AAA since 1917, was placed on negative outlook, Moody’s said in a statement Tuesday as it confirmed the rating after President Barack Obama signed into law a plan to lift the nation’s borrowing limit and cut spending. A decision on the rating may be made within two years, or “considerably sooner,” according to Moody’s Steven Hess.
The debt-limit compromise “is a positive step toward reducing the future path of the deficit and the debt levels,” said Hess, senior credit officer at Moody’s. “We do think more needs to be done to ensure a reduction in the debt-to-GDP ratio, for example, going forward.”
A ratings cut would raise the specter that the wrangling between Obama and Republican lawmakers over spending cuts and taxes will harm American prestige and the global financial system. JPMorgan Chase estimated that a downgrade would raise the nation’s borrowing costs by $100 billion a year. It could also hurt the rest of the U.S. economy by increasing the cost of mortgages, auto loans and other types of lending tied to the interest rates paid on Treasurys.
Fitch Ratings said Tuesday the U.S. is under a review as the nation’s debt burden increases at a pace not consistent with an AAA sovereign credit rating. Standard & Poor’s put the government on notice April 18 that it risks losing its AAA rating unless lawmakers agree on a plan by 2013 to reduce budget deficits and the national debt.
An increase in Treasury yields of 50 basis points would reduce U.S. economic growth by about 0.4 percentage points, JPMorgan said in a report, citing Federal Reserve research and data.
Obama signed the debt-limit compromise on the day the Treasury had warned that the nation’s borrowing authority would expire, ending a months-long debate that reinforced partisan divisions over federal spending.
Earlier Tuesday, the Senate voted 74-26 for the measure, which raises the nation’s debt ceiling until 2013 and threatens automatic spending cuts to enforce $2.4 trillion in spending reductions over the next 10 years. The House passed the plan Monday. S&P had indicated that anything less than $4 trillion in cuts would jeopardize the U.S.’s AAA rating.
