Ratings Agency: We Might Downgrade U.S. Credit

Yesterday, the credit ratings agency Moody’s Investor Service warned that it will have to review the U.S. government’s AAA credit rating and possibly downgrade it, given fears that the U.S. will fail to raise the debt ceiling and default on its debt.

Moody’s believes there is a “very small but rising risk of a short-lived default,” due mostly to the refusal of Republicans to raise the debt limit unless Democrats dramatically cut spending on social welfare programs. The determination of the Republicans not to raise the debt limit without spending cuts seems to have taken Moody’s by surprise. “Although Moody’s fully expected political wrangling prior to an increase in the statutory debt limit,” according to a statement released by the ratings agency, “the degree of entrenchment into conflicting positions has exceeded expectations.”

The statement goes on to say that if Democrats and Republicans come to an agreement to raise the debt ceiling and avoid default, the U.S. will keep its perfect AAA credit rating. But they better come to an agreement soon. The U.S. has until August 2nd to raise the debt ceiling and avoid a default, but Moody’s says it will consider downgrading U.S. credit “if progress in negotiations is not evident by the middle of July.”

Moody’s also wants the U.S. to work on reducing its growing deficit and debt, and warned that the U.S. will not maintain a AAA rating in the future if it does not reduce its deficit and debt. Republicans have already demanded that any decision to raise the debt ceiling must be accompanied by a spending cut to reduce future debt. Obama has invited the Republicans to work on a compromise to reduce the debt, trimming some government programs while closing tax loopholes and raising taxes on the wealthy. So far, though, Republicans have refused any deal that includes tax increases. This latest warning from Moody’s, along with increasing pressure from Wall Street, may convince them to make a deal.