July 22, 2024

Moody’s Warns of Downgrade for U.S. Credit

The warning, from one of the agencies whose assessments of creditworthiness help determine interest rates, amounted to a stern reminder from Wall Street to Washington that global financial markets are watching the budget battle closely and that a standoff or brinkmanship could have economic consequences.

Both sides seized on Moody’s statement to reinforce their bargaining positions, with Republicans demanding that President Obama get more serious about deep spending cuts and Democrats saying that Republicans are risking a financial crisis in pursuit of an ideological agenda.

Moody’s said a review of the credit rating was “likely” in July, given that “the risk of continuing stalemate has grown.” Its warning followed a similar one from another major ratings firm six weeks ago, and it came as the administration met Thursday with both House Republicans and Democrats in search of a deal.

The treasury secretary, Timothy F. Geithner, met on Capitol Hill with House freshmen, including Republicans who have suggested that they see little or no risk in a showdown over the debt limit. Citing the Moody’s statement, Mr. Geithner urged them to support raising it or risk an economic crisis.

“We didn’t create this mess,” one Republican told Mr. Geithner, according to a person in the room.

Independent analyses have shown that more than half of the $14.3 trillion debt is from policies enacted during the past decade when Republicans controlled both the White House and Congress, and much of the rest from lost revenues and stimulus spending and tax cuts since Mr. Obama took office at the height of the financial crisis and recession.

Mr. Geithner, as he left the Capitol, told reporters: “I’m confident two things are going to happen this summer. One is we are going to avoid a default crisis. And we are going to reach agreement on a long-term fiscal plan.”

Representative Austin Scott, the Georgia Republican who is the leader of the freshman class, said after the meeting that House Republicans had a “fundamental” difference with Democrats on taxes: instead of new tax revenues, the Republicans want additional tax cuts to increase economic growth. Still, he said, “I think we are all hopeful we will get to a resolution.”

Earlier, Mr. Obama and Mr. Geithner met privately with House Democrats at the White House about debt-reduction matters, following a similar session on Wednesday with House Republicans.

“Just as he discussed with the Republican caucus, the president highlighted the need for both parties to work together to take a balanced approach to deficit reduction, one that allows us to live within our means without hurting our ability to invest in the future or burdening our middle class or seniors,” an administration official said. 

House Democrats said they would support Mr. Obama if he reached a compromise with Republicans that included long-term spending cuts, but not to Medicare benefits, as well as higher tax revenues, according to those briefed on the meeting.

The House speaker, John A. Boehner, said in a statement, “The White House needs to get serious right now about dealing with our deficit and debt.” He interpreted the Moody’s report as bolstering his contention that “a credible agreement means the spending cuts must exceed the debt-limit increase.”

Moody’s, however, made no mention of how a deficit-reduction deal should be structured.

The Moody’s report was unexpected. In April, Standard Poor’s lowered its outlook for the AAA rating on United States debt — but not the rating itself — to negative from stable. Moody’s cautionary note was more pointed in that it was pegged to the current political maneuvering over the debt limit and it urged a resolution weeks sooner than the White House and Congressional leaders were aiming for.

Its warning was two-pronged. First, Moody’s said, if Congress does not increase the Treasury’s borrowing authority in coming weeks, the nation’s credit rating may be lowered “due to the very small but rising risk of a short-lived default.” That is likely to translate into higher interest rates at a time when the recovery shows signs of slowing again.

And second, Moody’s said, with an implicit slap at both parties, that whether the United States keeps its triple-A rating “will depend on the outcome of negotiations on deficit reduction.”

“Although Moody’s fully expected political wrangling prior to an increase in the statutory debt limit, the degree of entrenchment into conflicting positions has exceeded expectations,” the company’s statement said. “The heightened polarization over the debt limit has increased the odds of a short-lived default.”

The goal of the bipartisan budget talks that Mr. Obama initiated in April, led by Vice President Joseph R. Biden Jr., has been to reach agreement on deep long-term spending cuts by Aug. 2. That is when the Treasury Department has said it will run out of accounting maneuvers to meet the nation’s financial obligations without breaching the $14.3 trillion debt limit, which would provoke a crisis, even default.

House Republicans have said they will not agree to an increase without parallel action on spending cuts of an even greater amount. The debt limit would have to be raised $2.4 trillion to carry the government through 2012.

Republican leaders engineered a vote on Tuesday evening in which the House voted overwhelmingly not to increase the debt limit. They said that was their way of proving to Democrats that a rise in the debt limit could not pass without spending cuts attached. The Democrats countered that Republicans were risking an adverse market reaction by staging the vote, knowing it would fail.

Stock markets did fall more than 2 percent on Wednesday, but analysts generally attributed the slump to the day’s disheartening economic reports and anticipation that the government’s monthly jobs report on Friday would also be disappointing.

Even so, Republican Congressional leaders fretted that they could be blamed, according to Republican lobbyists who spoke with them. With Mr. Biden traveling in Italy this week, the negotiators are not scheduled to meet again until next Thursday. However, staff advisers continue working on proposals.

Article source: http://feeds.nytimes.com/click.phdo?i=05d9285366729a310ce0860f44166de4

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