Even if the US manages to avoid a technical default in August,downward pressure on its AAA credit rating will likely remain high,Moody's analyst Hess Steven said on Wednesday. Moody's will likely slap a negative outlook on its United States' ratings in the next few weeks if Washington fails to agree on a long-term budget deal that puts the country's debt on a downward path,Hess said in an interview. The fact that they haven't come to an agreement on the debt ceiling indicates to us that the outcome of the negotiations of the long-term debt situation may not be very positive,Hess said. Moody's on Wednesday placed the US credit ratings on review for a possible downgrade on increasing risk that the government may miss debt payments in August if lawmakers fail to increase the country's debt ceiling. Moody's intends to conclude that review as soon as it becomes clear whether a technical default may be avoided. At that time,it will also reassess whether the US deserves to retain a stable outlook on its ratings,based on the budget deal negotiated between Democrats and Republicans. We're willing to wait and see what the outcome for the negotiations is,Hess said. If they show significant progress in an agreement on the budget that reverses the upward debt trajectory,we would consider having the outlook assigned as stable. So far only Standard and Poor's has revised to negative the outlook on US ratings,which means a downgrade is likely in 12 to 18 months. US is at risk of losing its top-notch credit rating soon if a standoff in Congress over raising the U.S. debt ceiling prevents the government from honoring its debt payments in early August. The warning by Moody's Investors Service on Wednesday represented the biggest danger to date for the AAA rating of the US,whose debt provides the bedrock of the world's financial system. The agency has launched a review process that may result in a downgrade of US ratings in the next few weeks,adding pressure on Republicans and the White House to solve the debt problem.Rival ratings agency S&P in April revised its outlook on the US credit rating to negative,saying lawmakers may not reach an agreement to cut the nation's deficit meaningfully by 2013. The negative outlook means a downgrade is likely in 12-18 months.Even if the United States manages to avoid a short,technical default in August,Moody's may still follow S&P and revise the rating outlook to negative on longer-term debt concerns. Again,that would mean a downgrade is likely in 12-18 months and heap pressure on Washington to deal with the fiscal problems that underpin the debt ceiling row.All three ratings agencies have taken pains to explain that raising the debt ceiling and avoiding a default does not solve the long-term fiscal deficit problem of the U.S. government. Only an agreement that puts Washington on a path of deficit reduction and lowers the debt-to-GDP (gross domestic product) ratio will ultimately keep the world's largest economy from suffering a downgrade. Such a deal may have to include cuts to sacred cows such as welfare or social security programs and higher taxes.Investors have so far not priced in the possibility of a default and US Treasury yields remain near historic lows,meaning they are buying,not selling. But yields are likely to jump higher if there is no deal ahead of the August.deadline.That would put at risk the already slow recovery of the US economy.
