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US rating woes remain

business Updated: Aug 04, 2011 00:37 IST
Yashwant Raj

The deal is done, voted through the two chambers and signed into law by President Barack Obama. But the US is not out the woods yet for credit rating agencies, which are not sure if it is all going to end well.

Immediately after the agreement was reached, Fitch announced it was not changing its triple-A rating, as “the risk of sovereign default remains extremely low”.

But Moody’s, while retaining its triple-A rating, revised the outlook for the US government to negative — which basically amounts to putting it on notice: a downgrade could happen, a few months down the line.

Moody’s worries:

Fiscal discipline may weaken in the coming year

Fiscal consolidation measures may not be adopted in 2013

Economic outlook may deteriorate significantly

The government’s funding costs may overshoot what is currently expected.

All eyes are on S&P now.

There was much relief in Washington as Obama signed into law the deal that allows the US to borrow $ 2.1 trillion – over the present ceiling of $ 14.3 trillion – in two stages while cutting spending by the same amount over the next 10 years.

But for Fitch, the bigger worry is the economy itself.

“The US ... must confront tough choices on tax and spending against a weak economic back drop if the budget deficit and government debt is to be cut to safer levels over the medium term,” it said in a statement.

Obama and the Democrats remain keen on tax reforms. Obama said on Tuesday, “It … means getting rid of taxpayer subsidies to oil and gas companies, and tax loopholes that help billionaires pay a lower tax rate than teachers and nurses.”