Moody’s threatens US credit downgrade

Moody’s Investor Services says failure by by the US Congress to achieve policies designed to reduce the country’s sovereign debt level will leave it no choice but to issue a downgrade, possibly by early 2013.

In its latest outlook on US government debt, the rating agency said that any downgrade would depend on the outcome of budget negotiations “during the 2013 Congressional legislative session”.

“If those negotiations lead to specific policies that produce a stabilization and then downward trend in the ratio of federal debt to GDP over the medium term, the rating will likely be affirmed and the outlook returned to stable.”

“If those negotiations fail to produce such policies, however, Moody’s would expect to lower the rating, probably to Aa1 ” the rating agency said.

the current Aaa rating with a negative outlook is likely to be maintained until the outcome of the budget negotiations, it added.

Moody’s estimates that the US government’s ability to meet interest payments and other expenses within the current debt limit imposed by Congress will only last until the end of 2012, when it will hit that limit.

“Under these circumstances, the government’s rating would likely be placed under review after the debt limit is reached but several weeks before the exhaustion of the Treasury’s resources,” Moody’s warned.

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