Moody's Investors Service on Tuesday confirmed its Aaa rating of the United States, citing the decision to raise the debt limit, but assigned a negative outlook that could pressure lawmakers to cut the U.S. deficit.
Moody's decision came a few hours after rival Fitch Ratings upheld its AAA rating of the United States. Fitch also warned the world's largest economy must cut its debt burden to avoid a future downgrade.
Standard & Poor's, which many predict will cut its rating, has yet to give its opinion of the deficit reduction and debt ceiling deal hammered out in Washington and signed into law on Tuesday.
S&P, like Moody's prior to Tuesday's decision, also had the rating on review for a possible downgrade. Moody's negative outlook means a downgrade is still possible in the next 12 to 18 months.
The budget deal allows the U.S. Treasury to keep servicing U.S. debt obligations, pay soldiers and make social security payments. For details, see [ID:nN1E77111G]
"Today's agreement is a first step toward achieving the long-term fiscal consolidation needed to maintain the US government debt metrics within Aaa parameters over the long run," Moody's said in a statement.
With the debt ceiling issue solved, the agency is now focusing on the long-term challenges to U.S. public finances, burdened by a deficit that has reached about 9 percent of the country's economy -- close to the highest since World War II.
The U.S. Senate approved the $2.1 trillion deficit-reduction plan in a 74 to 26 vote. It passed the Republican-controlled House of Representatives on Monday, warding off the specter of a catastrophic U.S. debt default.
The bill lifts the debt ceiling enough to last beyond the November 2012 elections, calls for $2.1 trillion in spending cuts spread over 10 years and creates a bipartisan joint House and Senate committee to recommend a deficit-reduction package by late November. It does not include any tax increases.
Moody's said that while the combination of the congressional committee process and automatic triggers provides a mechanism to induce fiscal discipline, this framework is untested.
"They are simply saying they are waiting to see what develops with the new deficit budget commission. It is certainly reasonable given the U.S.'s fiscal position. Now that we are past the deficit issue, the fiscal issues over the long run will be the story," John Silvia, chief economist at Wells Fargo Securities in Charlotte, North Carolina.
U.S. markets were closed by the time Moody's issued its decision.
The dollar, already falling against the Swiss franc after weak economic data, fell to an all-time low in the wake of Fitch's statement. However, the greenback held steady against the euro, which is struggling with a sovereign debt crisis of its own.
"Because it had been discussed as a possibility, I think the market was ready for this (Moody's). The market is now much more focused on the employment number on Friday morning and economic fundamentals and how deep is this soft patch. The U.S. market is focused on Europe, the weakness in Europe and on Friday's number," said Quincy Krosby, market strategist at Prudential Financial in Newark, New Jersey.
On Friday the U.S. jobs report is forecast to show 85,000 new jobs were created in July, up slightly from the prior month with the unemployment rate holding steady at a hefty 9.2 percent.
"As the U.S. economy slows down, the deficit reduction is not a real deficit reduction, because GDP ends up being lower so the debt reduction ends up being smaller," said Aroop Chatterjee, currency strategist at Barclays Capital in New York.
"That is an additional factor on the minds of markets when they are looking at this, in terms of the debt deal, is what is done in Congress really meaningful in keeping the probability of a downgrade low? And in our view, the probability of a downgrade continues to be pretty high," he said. (Reporting by Walter Brandimarte and Daniel Bases; Editing by Andrew Hay)