Risk of US credit rating downgrade increasing, Moody's warns

Moody's has warned that it may have to apply a negative outlook to America's top-notch AAA credit rating because of the US government's failure to tackle its growing budget deficit. The report from the ratings agency, which came hours after a downgrade of Japan by Standard & Poor's and an IMF warning on growing budget deficits in both countries, reiterated previous comments made in December. Moody's said then that the extension of Bush-era tax cuts would increase the likelihood of a negative outlook on the US to credit rating in the next two years. A negative outlook makes a rating downgrade more likely in the next 12 to 18 months, which would push up the country's borrowing costs. The US deficit is expected to hit $1.5 trillion (£942bn) this year , or nearly 10% of US GDP. Moody's set out the risks to the US credit rating in a report last night. It expressed concern about the new configuration of the US Congress, saying it could reduce the chances of an agreement to rein in the deficit. The Republicans won majority control of the US House of Representatives in the November elections, although the Democrats continue to hold the majority in the Senate. Moody's is also concerned that Congress may fail to consider and pass into law some of the deficit-reducing measures proposed by the National Commission on Fiscal Responsibility and Reform . "Recent trends ... and the outlook for government financial metrics in particular indicate that the level of risk [to the US rating], while still small, is rising and likely to continue to rise in the next several years," said Moody's. "Although no rating action is contemplated at this time, the time frame for possible future actions appears to be shortening, and the probability of assigning a negative outlook in the coming two years is rising," it added.