A temporary fix to the U.S. debt problems could be a sign that Washington's final budget agreement will not be enough to meaningfully cut the nation's deficit, Moody's main analyst for the United States warned on Wednesday.
The idea of modestly raising the U.S. debt ceiling, just enough to buy a few more months of discussion in Washington, would delay a review of the U.S. ratings for a possible downgrade, Steven Hess told Reuters in an interview.
However, Moody's would still consider whether the United States deserves to keep its coveted AAA rating in the longer run.
We would still need to consider whether a stable outlook is appropriate, Hess said. That would depend on the likelihood that they would actually come up with a meaningful (budget) agreement during those few months.
A negative outlook on U.S. ratings would be a sign Moody's is likely to downgrade the country in the next 12 to 18 months if Democrats and Republicans fail to agree on a comprehensive plan to tackle the country's debt problems.
That debate has gained even greater urgency since Republicans said they want the administration to agree to deep budget cuts before they approve a much-needed increase in the U.S. debt ceiling.
Failure to increase the debt ceiling would lead the U.S. Treasury to miss debt payments in August, prompting deep rating downgrades from Moody's, Standard & Poor's and Fitch.
A small increase in that ceiling, Hess said, would just mean the problem was kicked down the road for a few months.
And that would not be good. You'd have that uncertainty continuing for an extended period, he said.
Moreover, Hess said, inability to come to an agreement now could be an indication that the final budget plan would not be strong enough to reduce the U.S. deficit in the long term.
(Reporting by Walter Brandimarte; Editing by Diane Craft and Andrew Hay)