NEW YORK (Walter Brandimarte) - Failure by a U.S. congressional committee to agree on $1.5 trillion in budget deficit cuts would be negative, but not a "decisive'' factor in the review of the United States' Aaa rating, Moody's Investors Service said Tuesday.
The agency, which revised the U.S. rating outlook to negative in August, said in a statement that inability by the committee to reach an agreement would indicate that Congress is less likely to pass any significant deficit reduction measures before the November 2012 presidential election.
"However, as $1.2 trillion in further deficit reduction has already been legislated through automatic spending caps if no agreement is reached, failure by the committee to reach agreement would not by itself lead to a rating change,'' Moody's said.
Investors are focused on Moody's assessment of the United States because the agency could be the second to downgrade the country after Standard & Poor's. Fitch Ratings also intends to review the U.S. AAA rating after the deficit-reduction committee concludes its work, but it has a stable outlook on that rating.
The bipartisan congressional committee formed to address the deficit issue and known in Washington as the "super committee'' needs to break an impasse between Republicans and Democrats to reach a deal by Nov. 23 to reduce the U.S. budget deficit by at least $1.2 trillion.
If a majority of the 12-member committee fails to agree on a plan, $1.2 trillion in automatic spending cuts will be triggered, beginning in 2013.
In its statement, Moody's reaffirmed and expanded on recent comments made by its lead U.S. analyst, Steven Hess, who last month told Reuters the agency was "not just waiting for this committee to decide on the rating.''
Among the issues being considered by Moody's to decide on the rating are the "policy environment'' resulting from next year's presidential elections, the budget for the 2013 fiscal year, and the future of the Bush-era tax cuts.
A decision on whether to renew or not those tax cuts, which expire late in 2012, would become all the more important if the committee fails because that would mean other major policy measures would probably not be forthcoming, Moody's said.
QUALITY OF DEFICIT REDUCTION
Another key point on Moody's radar is the composition of any deficit-reduction measures agreed by Congress.
A reform in entitlement programs would be more positive for the U.S. rating than just caps in discretionary government spending, Moody's said.
"Changes in the entitlement program tend to be permanent because they're not reconsidered every year,'' Moody's Steven Hess told Reuters in an interview following the release of thestatement.
Government discretionary spending, on the other hand, is reviewed every year in the budget.
"So there can be pressure that could cause the caps to not last as long as they are meant to,'' he said.
If enacted, those caps would allow no growth in discretionary spending during the fiscal years of 2012 and 2013, and only a modest annual increase of 2 percent thereafter through 2012, Moody's said in the statement.
The caps would force discretionary spending to fall to about 6 percent of gross domestic product by 2021, compared with an average of about 9 percent in the past 40 years, Moody's said, quoting data from the Congressional Budget Office.
That "would imply a substantial cutback in government services and, in the end, a smaller federal government, excluding entitlement programs, than has been the case in the past several decades,'' the agency said.
"Whether this will be supported politically over the long run is open to question.''
Finally, Moody's said, the United States' economic growth outlook also needs to be taken into account in the rating decision.
Moody's expect the U.S. economy to grow between 1.5 percent and 2.5 percent in 2012. Major deviations from that course could also impact the rating.
(Editing by Kenneth Barry and Jan Paschal)
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