Moody’s Top U.S. Rating Rebuts S&P

Moody’s Top U.S. Rating Rebuts S&P

By John Detrixhe - Aug 8, 2011

Moody’s Investors Service affirmed the U.S.’s top rating for the second time in a week, rebutting Standard & Poor’s after it stripped the world’s largest economy of its top credit status.

The U.S. today retained its Aaa ranking with a negative outlook in part because the dollar’s status as the main reserve currency allows it to support higher debt levels than other countries, Moody’s said today in a report. Lawmakers last week took a “positive step” toward addressing the nation’s record deficits, Steven Hess, the senior credit officer at Moody’s in New York, said in a telephone interview.

“What we’ve said over the last few months is that we now see at least both parties having the same goal of deficit and debt reduction over the long term, even though more needs to be done,” Hess said. “More important to us than how contentious the process is, does it produce results? What we’re looking at is actual policies as opposed to the political debate.”

The dollar, the most widely held currency in central banks’ global foreign exchange reserves, helps support the U.S.’s top credit ranking, as does its economy with “unparalleled size and diversity” and a government that’s characterized by “political and institutional stability,” Moody’s said in the report.
Buffett’s View

The U.S. on Aug. 5 lost its AAA ranking by S&P for the first time ever. The rating firm cited the political failure to reduce record deficits and weakening “effectiveness, stability and predictability of American policymaking and political institutions.” Billionaire Warren Buffett, the world’s most successful investor, said S&P erred and the U.S. should be rated “quadruple-A.”

Lawmakers agreed on Aug. 2 to raise the nation’s $14.3 trillion debt ceiling and put in place a plan to enforce $2.4 trillion in spending reductions over the next 10 years, less than the $4 trillion S&P had said it preferred.

“We don’t anticipate a scenario at the moment in which the U.S. would quickly return” to AAA, S&P analyst David Beers said in a conference call today. “Given the nature of the debate currently in the country, the polarization of views around fiscal policy right now, we don’t see anything immediately on the horizon that would make this the most likely scenario.”
Reserve Role

Moody’s has rated the U.S. Aaa since 1917 and said in a report today that the dollar’s role as the main reserve currency, “unique to the U.S., provides unmatched access to financing, meaning that the U.S. government can support higher debt levels than other governments.”

Both rating firms say the dollar will probably retain its role as the leading global currency.

“The country’s at an important inflection point as far as how we address the fiscal issues and growth for the future,” said Kathleen Gaffney, a money manager at Boston-based Loomis Sayles & Co., which oversees $162 billion. “In some sense, I’m an optimist that the U.S. will eventually get it right. This is potentially a catalyst for Washington.”

The dollar rose today against a majority of its most-traded counterparts as investors sought the refuge of U.S. government debt even after the rating downgrade as global stocks fell and U.S. stocks sank the most since December 2008. Yields on Treasury two-year notes reached a record low.
Debt Steps

“Getting there was difficult, but we shouldn’t miss the fact that they did take an action that was moving in the right direction,” Moody’s Hess said of the government compromise last week. “We’re not just looking at the politics. There’s lots of other things that go on here.”

To keep its Aaa ranking, the U.S. needs to take steps to rein in the debt-to-gross domestic product ratio to “not far above” 75 percent by about 2015, which is the ratio that’s forecast for 2012, Moody’s said in the report. A rating cut may be triggered before 2013 by weakening “fiscal discipline” or a worsening economic outlook that causes “adverse fiscal implications.”

The U.S. public debt to gross-domestic-product ratio of 69.8 percent this year will climb to 73.9 percent in 2012, according to Bloomberg Government data.

“Another factor that we are going to be watching is the performance of the economy,” Hess said. Negative outlook means there’s some possibility that the U.S. rating could go down anytime during the next two years, he said.

On Aug. 3 Moody’s said the outlook for the U.S. grade is now negative, after 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.

President Barack Obama’s renewed sense of urgency on the nation’s debt is “encouraging,” Deven Sharma, president of S&P, said in an interview on CNBC television today. Obama, breaking his silence on the downgrade of federal debt, said today that the U.S. “always will be a AAA country” and that he will release a new proposal to deal with the federal deficit in the coming weeks.