US economy 8216;set8217; for Moody8217;s downgrade

Moody8217;s Investors Service on Tuesday said it would likely cut its 8220;Aaa8221; rating on US government debt,probably by one notch,if budget negotiations fail.

If Congress and the White House don8217;t reach a budget deal,about 1.2 trillion in spending cuts and tax increases will automatically kick in starting Jan. 2,a scenario that8217;s been dubbed the 8220;fiscal cliff,8221; because it is likely to send the economy back into recession and drive up unemployment.

A year ago,Moody8217;s cut its outlook on US debt to 8220;negative,8221; which acts as a warning that it might downgrade the rating,after partisan wrangling over raising the US debt limit led the nation to the brink of default.

Rival agency Standard amp; Poor8217;s took the drastic step of stripping the government of its 8220;AAA8221; rating on its bonds on Aug. 5,2011. Fitch Ratings issued a warning of a potential downgrade.

In its report Tuesday,Moody8217;s said it is difficult to predict when Congress will reach a deal on the budget,and it will likely keep its current rating and 8220;negative8221; outlook until the outcome of the talks is clear.

In Washington,Moody8217;s action didn8217;t spur the politicians responsible for making a deal to sit down at the table.

House Speaker John Boehner,a Republican,said he8217;s not confident that Congress can reach a deal and avoid a downgrade. No serious negotiations are expected until after the November elections.

Boehner8217;s Democratic counterpart in the Senate,Majority Leader Harry Reid,was far more hopeful that 8220;some kind of agreement8221; would be reached after the elections. Reid suggested that the results of the election will weaken the Republican Party8217;s resolve to block tax increases on wealthier earners and that Republicans will be more willing to compromise.

Moody8217;s also noted that the government will likely again reach the debt limit by the end of the year,which means another round of negotiations in Congress on raising the limit if the US is to keep paying its bills.

8220;Under these circumstances,the government8217;s rating would likely be placed under review after the debt limit is reached,but several weeks before the exhaustion of the Treasury8217;s resources,8221; Moody8217;s analyst Steven A. Hess said in his report.

Despite the rating cut last year from Samp;P and the warnings from Moody8217;s and Fitch,the US has been able to continue borrowing at very low rates. That8217;s because investors are still buying US government bonds,as economic turmoil in Europe and uncertainty in other parts of the globe have left US debt and US dollars looking like safe bets. In contrast,bond investors demand high rates from troubled countries like Spain and Italy.

The stock markets plunged when the downgrade occurred in August 2011. The Dow Jones industrial average lost 634 points on the first trading day after Samp;P8217;s announcement. But Moody8217;s warning on Tuesday did little to ruffle traders. The Dow average rose 69 points to close at 13,323.

Rep. Barney Frank,the top Democrat on the House Financial Services Committee,called the Moody8217;s action 8220;nonsense.8221;

There8217;s no risk of the US defaulting on its debt obligations,Frank said in a telephone interview. He noted that Samp;P8217;s downgrade last year didn8217;t result in higher interest rates for the government.