By Peter Schroeder - 08/02/11 10:07 PM EDT
Moody's Investors Service became the second credit-rater to confirm the nation's AAA credit rating following an increase to the debt limit, but also noted that downgrade could be on the way if Congress does not follow through on its promises.
In a statement issued after markets closed, Moody's said the debt-limit deal passed by Congress and signed by the president Tuesday has "virtually eliminated" the possibility of a default. It called the deal a "first step" towards a better fiscal picture for the nation.
In effect, Moody's said it was not taking Congress at its word that more fiscal restraint would be forthcoming.
"Attempts at fiscal rules in the past have not always stood the test of time," the firm wrote, adding that it expects policymakers to continue showing fiscal discipline despite upcoming elections and the expiration of Bush-era tax cuts at the end of the year.
In addition, Moody's said further steps will be needed beyond the debt-limit deal if the nation wants to keep its top rating, saying it expects the debt-to-GDP ratio to begin to decline this decade. But as the debt debate proved, Moody's is aware that political challenges lie ahead for the nation.
"Wide political differences that have characterized the recent debt and fiscal debate, if they continue, could prevent effective policymaking around that time," it said. "Measures that further reduce long-term deficits would be positive for the rating; a lack of such measures would be negative."
Moody's statement came after FitchRatings affirmed the nation's top rating following approval of the debt and deficit plan by Congress. The only major rater that still has not weighed in on the matter is Standard & Poor's, who warned in July there was a 50 percent chance it would downgrade the nation's debt in the next three months.
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