On September 11, Moody’s Investor Service issued an update on its outlook for the credit rating of the U.S. federal government, indicating that rising public debt and Congressional intransigence in budgetary negotiations may lead the agency to downgrade the U.S. rating from its current AAA status.
Last year, Standard & Poor’s (S&P) downgraded its rating of U.S. credit due to “political brinksmanship” surrounding the raising of the statutory debt limit established by Congress. Failure to raise the limit would have forced the government to default on its financial obligations.
At the time, Moody’s upheld its AAA rating of U.S. credit, but changed the outlook to “negative” – indicating that it may consider a downgrade in the future if high spending and political gridlock continued. Fitch, the other major ratings agency, maintained its AAA rating and a stable outlook.
Moody’s cited ongoing negotiations regarding the 2013 budget as the key consideration in its assessment of U.S. creditworthiness.
“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,” Moody’s explained in a press release.
It is unclear exactly what consequences would stem from a downgrade by Moody’s, especially given that the projected effect of the S&P downgrade – substantially higher borrowing costs for the federal government – failed to materialize.
However, businesses must analyze the situation and account for the potential effects of a downgrade in order to plan their long-term strategies accordingly. Working with the experts at a financial project consulting service can help companies assess external risk factors and ensure that they are positioned to succeed in the future.