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Moody’s Says U.S. Credit Rating Contingent on Federal Budget

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In recent years, partisan politics has led to a number of issues, one of the largest being the downgrade of the United States’ credit rating. Now, one of the top credit rating organizations in the world says further political posturing could result in another downgrade.

In August 2011, the credit rating agency Standard and Poor’s downgraded the rating for the U.S. federal government for the first time in its history, from AAA to AA+, and another such organization said it might be forced to do the same in the near future, according to a report from Moody’s Investors Service. The decision to maintain the government’s rating with a negative outlook now hinges upon whether Democrats and Republicans can reach an agreement related to the federal budget.

“If those negotiations lead to specific policies that produce a stabilization and then downward trend in the ratio of federal debt to GDP over the medium term, the rating will likely be affirmed and the outlook returned to stable,” Moody’s announced.

However, if that does not happen, the credit rating agency would likely be forced to lower its evaluation of the U.S. to AA1, the report said. Further, it believes that the government’s ability to maintain its AAA with a negative outlook through the end of next year as being rather improbable. However, it is also difficult to guess at how the next Congress, which will be elected in November, will approach these negotiations, and therefore predicting the credit rating over the course of 2013 is likewise not easy.

Moody’s notes that the current debt limit, which was the point of contention last time America’s credit rating was downgraded, will likely be reached around the end of this year, the report said. As such, the government’s ability to make its debt payments using resources available to it will probably run out a few months after the new year begins.

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Americans should be concerned with such a credit downgrade since it can have a negative impact on the interest rates they pay for all kinds of financing. This includes mortgages, credit cards, auto loans and so forth that are granted to them by lenders, and interest rates could rise significantly if similar action is taken.

Image: jacqueline.poggi, via Flickr

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