Moody's: Congress must reach fiscal deal to avert downgrade

Moody's Investors Service warned Tuesday that Congress will need to strike a deal on the "fiscal cliff" to avoid a second downgrade to the nation's credit rating.

The rating agency said that budget negotiations in 2013 will likely determine the fate of the nation's credit rating, adding that an inability to strike a deal with "specific policies" to change the nation's debt trajectory would likely mean a downgrade. 

Moody's still rates the nation as a top-shelf AAA credit, but with a negative outlook as it has warned policymakers they must adjust the nation's fiscal course to retain its financial reputation.

The good news for lawmakers is that if they can somehow strike a broad fiscal deal in the next 12 months, it will likely mean the nation can protect its AAA rating from Moody's, and the agency would revoke its negative outlook in favor of a stable one.

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Ever since the drama of last summer's debt-limit fight brought the nation's credit standing into question, rating agencies have been stern and consistent in their calls for changes to fiscal policy to halt the nation's growing debt. 

All three major rating agencies — Moody's, FitchRatings and Standard & Poor's — have warned that fiscal changes are needed to prevent future downgrades. Standard & Poor's made history following the debt-limit fight by issuing the first-ever downgrade to the nation's credit rating, citing the political brinksmanship that threatened the ability of the government to meet its obligations.

Moody's made clear it will not wait forever for Congress to reach an agreement, saying it views maintaining the status quo — a top rating with a negative outlook — as "unlikely" going into 2014.

In fact, the only way Moody's anticipates it would keep that position for beyond 2013 is if Congress actually allows the nation to go over the fiscal cliff — allowing the Bush tax cuts to expire and automatic spending cuts to take effect. While such steps would shape up the nation's books, economists argue the shock could thrust the nation back into a recession.

But Moody's said it would wait to see if the economy could actually dig itself out from that shock before deciding whether to return the nation to a stable outlook and AAA rating. In addition, the agency said it is assuming Congress has learned its lesson from last time, and will raise the debt limit again when needed in a "relatively orderly process." It said it expects the nation to hit the limit near the end of the year, and would likely need to raise it sometime in the first few months of 2013.