Moody's: Political landscape still a downgrade danger to US credit rating

The recent election has not changed the "highly polarized and unpredictable" political landscape that still presents a threat to the nation's credit rating, according to Moody's Investor Services.

In analysis released Tuesday, the rating agency said it still assigns a negative outlook to the U.S. credit rating, noting that how or even if Washington will address the "fiscal cliff" and the deficit remains an open question.

"Despite the clarity gained from the election outcome, it remains difficult to predict when Congress will conclude negotiations that result in the passage of a budget package that either avoids or remedies the deleterious economic effects of the imminent fiscal shock," the group wrote. "It is also not clear whether policymakers can reach consensus on measures that would result in a stable and ultimately declining debt trajectory."


The rater cautioned against a "punt" into 2013, in which Congress and the White House would extend existing policy with plans to address it in 2013, warning that if Washington does so without establishing an "apparent commitment" and "credible timetable" to actually striking a deal, it could issue a downgrade — such behavior would "be inconsistent" with a top-shelf rating, it said.

Moody's also warned that the close popular vote in Tuesday's presidential election could encourage the two parties to continue "intense political posturing." Furthermore, the approaching debt limit — which the U.S. could reach by the end of the year and would need to raise in the first few months of 2013 — would present another threat to the nation's financial stability and a political threat to investors.

In short, Moody's said that the nation's credit rating hangs on the outcome of fiscal talks in 2013. If policymakers can strike a deal to gradually reduce the trend in the nation's debt, the nation would keep its AAA rating. If not, Moody's would downgrade the U.S.

However, the rater was not as explicit when it comes to the "fiscal cliff," the combination of automatic spending cuts and expiring tax cuts set to take effect at the beginning of 2013. That set of policy changes would improve the nation's fiscal situation, but experts have warned its dramatic impact could result in a recession. Moody's said it would wait to see if the U.S. economy could withstand the shock before deciding what to do with its credit rating.

On Wednesday, FitchRatings issued a similar warning, calling on President Obama and Congress to strike a deal averting the fiscal cliff and to promptly raise the debt ceiling. A failure to do so would be an indication that political gridlock had not been cured by the election, raising doubts about its AAA rating.