The Two-Way
11:59 am
Tue September 11, 2012

Moody's Warns Of Downgrade If Congress Doesn't Move On Fiscal Cliff

We've already heard warnings about the so called "fiscal cliff" from the Federal Reserve and the Congressional Budget Office.

What we know for sure is if Congress does nothing, Bush-era tax cuts that have been in place for nearly 12 years will expire and $1.2 trillion of across-the-board cuts will be triggered come Jan. 1. What's less clear is what happens to the U.S. economy as a result. Many economists — including the non-partisan CBO — predict that with the economy in such a vulnerable place, rapid changes like these can push it back into recession.

Today, Moody's sounded one more alarm saying if Congress remains in a stalemate, it would downgrade the U.S. credit rating from a AAA to a AA1.

Bloomberg reports:

"Moody's put the rating under review with a negative outlook in August 2011, when the U.S. pushed back a decision on spending and raised its so-called debt ceiling after months of political wrangling. S&P cut its rating to AA+ that month, blaming the nation's political process. Investors ignored the reduction and Treasuries rallied, with the yield on the benchmark 10-year note since declining to record lows and the S&P downgrade drawing the ire of investors such as Warren Buffett, the biggest shareholder of Moody's, who said after the S&P decision that U.S. should be 'quadruple-A.'"

"'At some point, we might see the market demand a higher yield premium to own Treasuries, but I don't think that's the case now as this is just a shot across the bow,' said Jack McIntyre, a money manager in Philadelphia at Brandywine Global Investment, which oversees $30 billion of debt. 'It's hard to find a bond market that has the depth of liquidity that Treasuries do.'"

Today, the Republican Speaker of the House John Boehner threw another wrench in the narrative, saying he doesn't have much hope for a deal.

"I'm not confident at all," Boehner said Tuesday according to Reuters. "The House has done its job on both the sequester and on the looming tax hike that will cost our economy 700,000 jobs. The Senate at some point has to act. And on both of these, where's the president, where's the leadership?"

Now, we all know that Washington has a way of wrapping things up with the deadline at arms reach. That was the case with the debt ceiling deal, which was signed Aug. 1, 2011 — a whole day before the Aug. 2 deadline.

Politico keeps it real. They wrote yesterday that yes Washington — all of them Republicans and Democrats — acknowledge this is a pressing issue, but none of them are sitting around a negotiating table.

Here's where things stand, according to Politico:

"The truth is that none of the top leaders or their aides are in serious negotiations. This leaves the key players simply pointing fingers and praying that voters clarify Washington's power structure in November in a way that favors Republican entitlement cuts or Democratic tax hikes. The winners at the ballot box will get to set the terms, the thinking goes. Until then, don't give an inch.

"The only lawmakers negotiating right now belong to the Senate's Gang of Eight, a salon of solvency hawks with little sway so far. They meet this week at 5 p.m. Tuesday. But their group has been huddling for months with little to show for it, and the real players — Obama, House Speaker Boehner (R-Ohio) and Senate Majority Leader Harry Reid (D-Nev.) — aren't engaged, and neither are the staffers who do the heavy lifting on legislative deals."

Copyright 2012 National Public Radio. To see more, visit http://www.npr.org/.