Moody’s is considering downgrading the US credit rating. Here’s the short version of why:

  • Budget negotiations likely to determine AAA rating and outlook
  • If budget talks do not produce downward trend in debt-to-GDP ratio, rating likely to be lowered to AA1
  • Assumes “relatively orderly” process for increasing debt limit

The longer explanation is here. Moody’s currently rates the US as AAA with a negative outlook, but:

Moody’s views the maintenance of the Aaa with a negative outlook into 2014 as unlikely. The only scenario that would likely lead to its temporary maintenance would be if the method adopted to achieve debt stabilization involved a large, immediate fiscal shocksuch as would occur if the so-called “fiscal cliff” actually materializedwhich could lead to instability. Moody’s would then need evidence that the economy could rebound from the shock before it would consider returning to a
stable outlook.

The United States has not even had a federal budget in nearly four years. There is no reason to believe that if the election maintains the status quo, with Democrats in control of one house of Congress and the White House, that a deal will produce the downward trend in the debt-to-GDP ratio that Moody’s is looking for.

If a downgrade occurs, it would be just the second such downgrading of US credit. Standard and Poor’s downgraded the US credit rating in August 2011, and promptly found itself under federal investigation.