Moody’s Investors Service and Fitch Ratings affirmed their “AAA” credit ratings for the US while warning that downgrades were possible if lawmakers fail to enact debt reduction measures and the economy weakens.
The outlook for the US grade is now negative, Moody’s said in a statement on Tuesday after US President Barack Obama signed into law a plan to lift the nation’s borrowing limit and cut spending following months of wrangling between Democratic leaders and Republican lawmakers.
The compromise “is a positive step toward reducing the future path of the deficit and the debt levels,” Steven Hess, senior credit officer at Moody’s in New York, said in a telephone interview.
“We do think more needs to be done to ensure a reduction in the debt to GDP ratio, for example, going forward,” he said.
A decision on the rating may be made within two years, or “considerably sooner,” according to Hess.
The ratio of general government debt, including state and local governments, to GDP is projected to climb to 100 percent next year, the most of any “AAA”-ranked country, Fitch said in April.
Fitch’s David Riley said that while the rating may be cut in the medium term, its risks in the near-term “are not high.” The company expects to complete the ratings review by this month.
“Although the agreement is a good first step in adjusting the fiscal challenges that the US faces, it is just a first step,” Riley, Fitch’s London-based head of sovereign ratings, said on Tuesday.
Standard & Poor’s put the US government on notice on April 18 that it risks losing its “AAA” rating unless lawmakers agree on a plan by 2013 to reduce budget deficits and the national debt.
S&P, which has ranked the US “AAA” since 1941, rates 18 sovereign issuers as “AAA,” including Canada, Germany and Singapore, according to Bloomberg data. Spain and Japan are among those ranked “AA” by the ratings company.
China’s central bank will “closely” monitor US efforts to tackle its debt, Governor Zhou Xiao-chuan (周小川) said in a statement yesterday, reaffirming that his nation will diversify its foreign-exchange reserves. China’s Dagong Global Credit Rang Co (大公國際信評) cut its credit rating for the US to “A” from “A+” with a negative outlook, it said in an e-mail statement yesterday.
Tuesday’s agreement to raise the debt ceiling will precipitate a crisis in the US and the nation’s ability to service its debt won’t change “positively,” adding to the “inevitability of a sovereign debt crisis,” the company said.