A long-term deficit reduction compromise is needed to satisfy the market's concerns
Time is running out for Washington to get its act together on the debt ceiling. On Wednesday, credit rating agency Moody's put the U.S. debt rating on review for possible downgrade. It had warned that a formal review announcement would come if the debt ceiling dispute wasn't resolved by July. The firm says that it will downgrade the U.S. in August if the government misses a debt payment. But the rating agency also clearly states that raising the debt ceiling alone won't give it any confidence in the U.S.'s ability to tackle its broader deficit problem.
Here's the key section from Moody's statement:
If the debt limit is raised again and a default avoided, the Aaa rating would likely be confirmed. However, the outlook assigned at that time to the government bond rating would very likely be changed to negative at the conclusion of the review unless substantial and credible agreement is achieved on a budget that includes long-term deficit reduction. To retain a stable outlook, such an agreement should include a deficit trajectory that leads to stabilization and then decline in the ratios of federal government debt to GDP and debt to revenue beginning within the next few years.
Raising the debt ceiling isn't enough. Even though Republicans turned the debt ceiling debate into a broader discussion about the U.S.'s debt trajectory, the market appears to have embraced their approach. This means that there's no quick fix here: a substantial long-term deficit plan must be agreed upon by the two parties.