U.S. may lose triple-A rating if budget talks fail to reduce debt

LONDON/NEW YORK (Reuters) - The United States may lose its triple-A debt rating if next year's budget negotiations do not produce policies that over time decrease the country's debt, Moody's Investors Service said on Tuesday.

"If those negotiations lead to specific policies that produce a stabilisation 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," Moody's said in an emailed statement.

"If those negotiations fail to produce such policies, however, Moody's would expect to lower the rating, probably to Aa1."

Rival ratings agency Standard & Poor's stripped the United States of its top ratings last year after Congress failed to come up with a long-term deficit reduction plan and political fighting brought the country to the brink of default.

The U.S. dollar fell after the announcement, with the euro spiking to a four-month high.

Moody's rates the United States Aaa but has the country on negative outlook. That probably won't change until after Congress concludes budget talks next year, it said.

But the current situation was unlikely to persist beyond 2014, the agency said. That would only happen if the method Congress adopted to reduce the deficit involved a large fiscal shock.

"Moody's would then need evidence that the economy could rebound from the shock before it would consider returning to a stable outlook," the agency said.

Such a shock could come if Congress allows a slate of temporary tax cuts to expire as planned at year-end. Automatic spending cuts would also be triggered.

The Congressional Budget Office said such an outcome could shrink U.S. gross domestic product by 2.9 percent in the first half of next year.

In such a case, the CBO director said, Americans should expect a "significant recession" and the loss of some two million jobs.

(Reporting by William James in London and Steven C. Johnson in New York; Editing by James Dalgleish)

Source: http://finance.yahoo.com/news/u-aaa-rating-depends-fall-debt-ratio-moodys-133349936--business.html

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