US rating still at risk despite reduced threats from DC

Jan 30 2013, 09:46 IST
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SummaryThe country has retained its top triple-A rating from Moody's Investors Service and Fitch Ratings.

The retreat by Republicans from threats to push the United States into a debt crisis has stayed the hand of at least one credit ratings agency, but that does not mean the United States is suddenly safe.

The country has retained its top triple-A rating from Moody's Investors Service and Fitch Ratings, despite rising debt levels. It was downgraded by one notch in 2011 by Standard & Poor's after a chaotic debt ceiling battle. On Monday, Fitch said the recent debt ceiling extension eliminates the immediate risk to the rating.

But going forward, the emerging signs of lawmakers working together are not likely to be enough to head off more downgrades of US government debt, which is used as a benchmark for borrowing costs and considered the safest of safe havens.

There is no exact formula for what will trigger a downgrade, but statements and reports released by the agencies give some clues. Specifically, the US debt-to-GDP ratio, currently at about 68 percent, is better than triple-A rated nations such as Canada, but far worse than Australia or Norway.

"The negotiations for the medium-term deficit and debt trajectory are the most important things in our ratings," said Steven Hess, lead US sovereign credit analyst at Moody's Investors Service.

"We're looking for a convincing downward trajectory in the debt ratios and we don't think that that's yet there."

The US government has jumped from crisis to crisis in recent years, beginning with the 2011 debt ceiling battle, followed by the threat of the "fiscal cliff" of major tax increases and spending cuts that emerged late last year. It was also thought that Republicans would force drastic spending cuts by refusing to raise the debt limit, until recently merely a procedural matter.

However, even with the parties in Washington behaving, that is still not enough until debt levels are addressed.

Moody's has said specific measures to trim the debt-to-GDP ratio over time would likely get the US Aaa rating affirmed and remove the danger of a downgrade. Budget deals that do not do that, or do it too slowly, will imperil the credit rating.

The agency said it will probably resolve the country's negative outlook by the end of this year, whether the budget questions get ironed out or not.

The other potential risk is that, instead of a stalemate, the warring parties in Washington delay tough decisions in much the same way they have put them off in the past,

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