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Rating Agencies Know a Fate Worse Than the Fiscal Cliff

Tickers in this article: MCO

In contrast, were lawmakers to broker a fiscal cliff deal that kicks the can down the road on debt reduction without outlining specific budget stabilization plans, Moody's hints at a possible downgrade prior to 2014.

The opinions of ratings agencies matter for investors. When S&P cut the U.S. government's debt ratings from AAA in the wake of a last minute August 2011 deal to raise the government's debt limit and stave off a default, markets sold off sharply.

Fitch Ratings , meanwhile, remains optimistic of a deal by year end and points political gridlock as reason to consider a downgrade of the U.S. government's debt rating. Were fiscal cliff negotiations to drag well into 2013, Fitch said earlier in December it could lead to a ratings cut. " The U.S. sovereign rating could be subject to review, potentially leading to a negative rating action," in a protracted negotiation, Fitch said in a report earlier in December.

In September, independent ratings firm Egan Jones cut the U.S. government's debt rating one level to AA-, noting how the Federal Reserve's easing efforts may hit the U.S. dollar and drive up inflation. On Aug. 5, S&P was the first agency to cut the government's debt rating, lowering it to AA+ as a result of what's now known as a 'fiscal cliff' that falls short of what's needed to stabilize the government's medium-term debt issues.

As investors parse over an increasingly frenetic and hard to read dance between Democratic and Republican lawmakers, they should take note of ratings agencies, the silent arbiter of any prospective budget deal. While heading over the cliff may appear to be the worst possible outcome for investors, agencies see differently.

For more on the fiscal cliff, see why a housing recovery could blunt a partisan standoff .

-- Written by Antoine Gara in New York