Did Moody's Just Side With Republicans on the Debt Ceiling Battle?

A senior credit officer says that a long-term deficit plan should be part of the deal

590 capitol ceiling REUTERS Hyungwon Kang.jpg

Add Moody's to the list of rating agencies concerned over Washington's failure to reconcile its taxing and spending. We already saw Standard and Poor's making the first move towards downgrading the U.S.'s AAA-rating in April, when it revised its outlook for the nation's debt to negative. Today, Steven Hess, senior credit officer at Moody's, says that if a debt ceiling agreement isn't reached by mid-July, the U.S. could be put on review for downgrade. In his comments, however, he appears to validate the current debt ceiling battle as a good time to make a long-term deficit deal.

In an interview, John Detrixhe from Bloomberg reports Hess saying:

The negotiations now on deficit reduction over the medium term are a significant opportunity to actually do something on that front. Although fundamentally, the debt limit question is separate from long-term deficit reduction, they seem to be linked at this point in Washington.

The chances of them coming to an agreement, we think, are much reduced if this opportunity goes by and nothing happens.

This must infuriate Democrats. For months they have been complaining that the debt ceiling debate is a ruse on the part of Republicans to create an issue out of a procedural necessity. Now, however, it looks like one of the rating agencies is siding with Republicans. Hess here essentially says that if legislation raising the debt ceiling doesn't include a plan for long-term deficit reduction, then the firm will view Washington's inaction as a problem.

Just to be clear, Hess doesn't think that raising the debt ceiling should have necessarily been connected to broader deficit reduction. But he says that in this case, it's pretty clear that the two are married, for better or for worse. Republicans may have created this new frame-of-reference, but that's now the only lens through which Congress can view the world.

Hess is probably right: if the debt limit is raised without a broader, significant long-term agreement to cut deficits, then such a plan isn't likely to materialize in the near-term. The debt-ceiling debate will easily carry us through much of the summer. Once it's raised, Congress will move on to other priorities in the fall and certainly won't want to continue talking about the deficit for some time. Before we know it, the 2012 election season will be upon us, and then Congress won't do much of anything. So for a long-term deficit reduction plan to succeed, it's likely now or not for a long time.

Still, the failure to agree on a long-term deficit plan won't necessarily result in a downgrade. He also said in the interview that the U.S.'s Aaa-rating will remain intact as long as no debt payment is missed, even if that includes raising the debt ceiling without a long-term debt plan put in place. But without such a plan, Moody's will likely match S&P's recent move and change the U.S.'s outlook to negative.

Image Credit: REUTERS/Hyungwon Kang