Two U.S. credit agencies made moves Monday that highlighted the growing fiscal crisis faced by Washington as the U.S. Congress and the White House try to hammer out a deal on the government's debt ceiling.
Egan-Jones Rating Co. chopped its rating of U.S. debt, to double-A, down from triple-A, the first downgrade faced by the federal government in the current struggle over how best to close the gap between public revenue and expenditures.
The Egan-Jones move is not expected to influence markets too much since the agency is one of the smaller rating concerns in the United States. The agency, however, pointed out that finding a solution concerning how to reduce spending and whether to raise taxes is more important than worrying about a short default due to a technical ceiling on the government's ability to borrow more cash.
Two agencies, same message
Moody's, a more influential rating agency, said roughly the same thing Monday. Moody's said any agreement on the U.S. debt ceiling must include long-term measures to cut public spending and the federal deficit.
An agreement on raising the U.S. government's $14.3 trillion US ceiling on its borrowing "would be a positive step in the short term", the ratings company said.
"(But) without more substantial deficit reductions being included in such a plan, it would be negative for the long-term outlook," Moody's said.
The commentary was addressing the ongoing discussions between the U.S. Congress and the administration of Barack Obama aimed at hiking the U.S. government's debt ceiling.
The two sides met over the weekend but failed to reach an agreement. Without such a deal in place, the federal government could default on its outstanding debt as early as Aug. 2.
In recent days, there had been hints that Republican senator Mitch McConnell and Democrat Harry Reid were inching towards a partial settlement which would see the U.S. debt limit rise in three relatively small hikes — one for $700 billion US followed by a pair of $900 billion US increases — while leaving longer term questions of spending cuts and tax hikes for future talks.
Wide gap between positions
Moody's, which has already warned that it might downgrade its view of U.S. debt, threw cold water on the notion of a short-term-only deal. The agency argued that the failure to get a grasp on the underlying fiscal issues would hurt the U.S. government's debt repayment prospects down the road.
Moody's missive is only the latest twist in increasingly-worrisome negotiations that have pitted politically-listing Barack Obama and his efforts to cobble together a spending-cut-and-tax-hike package against the Tea Party-tinged Republicans in Congress who have argued that any tax hike would only kill American jobs.
Obama had already ruled out any short-term deal that would raise the debt ceiling but not address the underlying fiscal issues. But he is equally unlikely to hold the moniker as the only U.S. president to allow the United States to default on its debt.
Conversely, the Republicans can see political gains from hammering a Democratic president as an election year looms in 2012. The GOP, however, also faces an electorate which opposes its 'no-tax-hike' by 79 to 21 per cent in a recent CBS poll.