Moody's Investors Service

Moody’s eases off threat of US rating cut, affirms Aaa

PUBLISHED : Friday, 19 July, 2013, 11:37am
UPDATED : Friday, 19 July, 2013, 11:37am

Moody’s Investors Service has raised the US sovereign outlook to stable from negative and affirmed the country’s triple-A rating, citing steady growth despite reduced government spending.

The rating agency’s move eased the threat of a cut to the world’s biggest economy.

Moody’s said the federal government’s debt trajectory is on track with criteria the rating agency previously laid out, even without further budget measures from Washington.

The economy is growing moderately, but it is still “progressing at a faster rate compared with several Aaa peers and has demonstrated a degree of resilience to major reductions in the growth of government spending,” Moody’s said in a statement.

The US budget outlook has brightened in recent months, alleviating some of the pressure on policymakers for more fiscal compromises.

On May 14, the non-partisan Congressional Budget Office said the US federal budget deficit is shrinking at a faster pace than expected, and forecast this fiscal year would end with the smallest shortfall since 2008.

“We feel that we have enough information on the debt trajectory at this point to make a conclusion even without information on any possible further actions in Washington,” said Steven Hess, Moody’s lead US sovereign credit analyst.

Even the possibility of further debate on raising the US debt ceiling this year - allowing the government to keep borrowing money - is unlikely to hurt the rating, Hess said.

“We think that they will raise the debt ceiling, as they always have in the past,” he said. “But even if there’s some delay, we’re not too concerned about that affecting the government’s ability to service its debt.”

Analysts said the affirmation means the US sovereign rating could be safer now for years to come.

“We are still running sizable deficits but they are not getting worse,” said Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott in Philadelphia.

“Barring a nuclear event or the re-emergence of the debt ceiling problem, this drastically reduces the chance of a US downgrade in the next couple of years,” he added.

Last month Fitch also affirmed the US sovereign AAA rating. But that agency kept a negative outlook, saying still-elevated debt levels leave the country vulnerable to shocks without more deficit reduction.

Standard & Poor’s rates the country AA-plus, with a stable outlook. S&P cut the rating in August 2011 after a bruising round of debt ceiling debates in Washington raised fears of political dysfunction.

In addition, Moody’s affirmed the Aaa senior ratings of Fannie Mae, Freddie Mac, the Federal Home Loan Banks and the Federal Farm Credit Banks, which the agency considers to be directly linked to the rating of the US government.

While the stable outlook means the agency is unlikely to cut the US sovereign rating in the medium term, Moody’s noted that could change in the future.

“Without further fiscal consolidation efforts, government deficits are anticipated to increase once again over the longer term,” the Moody’s statement said.

The outlook covers the next couple years or so, Hess said.

After that, he added, “a triple-A rating is not guaranteed forever.”