Moody's: Downgrade of US debt not automatic if supercommittee fails

The fate of the nation's AAA credit rating does not hinge solely on the final product of the deficit supercommittee, according to Moody's Investors Service.

The credit rater said Tuesday that while there is a "significant chance" the panel will fail to reach a deal, the ultimate outcome of its work will not be "decisive" in assessing whether to keep the nation's credit rating at AAA.

Moody's said it is going to be looking at the composition of any deal reached in assessing the nation's credit, and any positive momentum toward dealing with the deficit would be recognized — whether it comes from the supercommittee or the automatic triggers that are supposed to kick in if a deal falls through.

"Agreement by the [supercommittee] and the Congress as a whole on a larger amount of deficit reduction would be favorable, but the smaller amount triggered by the spending caps is still a step in the same direction," the rater said in a new report. "Thus, the committee outcome will not necessarily lead to any change in our rating stance."

After the debt-ceiling fight ended in August, Standard & Poor's issued the first-ever downgrade of the nation's debt, dropping the U.S. rating to AA+. The agency had warned that any agreement to raise the debt limit needed to include major deficit reduction and found the debt deal underwhelming on that score.

Moody's and FitchRatings, the other two major rating agencies, did not follow S&P's lead and kept U.S. debt at AAA. But both warned that the U.S. needs to do more to tackle the deficit.

Major banks have grown increasingly nervous that the deficit panel is going to deadlock and fail to reach an agreement by the Nov. 23 deadline, possibly drawing another downgrade from one or more of the credit raters. S&P's decision in August preceded a month of heavy losses on Wall Street.

Moody's analyst Stephen Hess told The Hill in October that the outcome of the supercommittee would be a factor in the nation's rating, but not necessarily a determinant. He also said Moody's is "agnostic" on whether the deficit should be addressed via spending cuts or tax hikes.

While Moody's is not resting its rating solely at the feet of the supercommittee, it did say that certain steps would go further than others. For example, reform to entitlement programs would reflect well on the nation's rating, as they would tend to be more permanent than piecemeal cuts.

And though the supercommittee's failure would trigger $1.2 trillion in automatic cuts, Moody's did say that such a failure would lower expectations for the remainder of the 112th Congress to do anything else major on the deficit.

As a result, the possible extension of the George W. Bush-era tax rates take on particular importance, as they would appear to be the only major policy decision that impacts the deficit to be addressed by the Congress. Those cuts are set to expire at the end of 2012.