Moody's Poised for Big Fiscal Cliff Call
NEW YORK ( TheStreet) -- Ratings agency Moody's is poised to make a big call on how the 'fiscal cliff' and presidential elections will impact its rating of the U.S. government's debt and the bonds of corporations with heavy government sales or regulation.
In a set of Monday research notes, Moody's outlines how the presidential elections and the prospect of a fiscal cliff standoff may impact a range of debt ratings spanning the U.S. Treasury to the healthcare, defense and oil and gas sectors - but the agency isn't yet ready to take a stand on potential downgrades and upgrades just yet.
According to Moody's, the re-election of President Barack Obama gives little certainty over the existential issues that hang over the government's finances, notably a potential 'fiscal cliff' of budget cuts and tax increases scheduled for early 2013 and an increase to the nation's debt limit, which some forecasts indicate may be reached by the Spring.
Already, Moody's has played a slow-hand in deciding whether to downgrade the U.S. government's debt ratings, after competitor Standard & Poors cut the U.S. from AAA in the wake of a last minute August 2011 deal to raise the government's debt limit and stave off a default.
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.
Moody's sees the fiscal cliff and the government's debt with a little more optimism. The agency said in September it may downgrade the U.S. debt rating from Aaa - its highest rating -- to Aa1 by 2014 if budget negotiations during the 2013 Congressional legislative session fail to stabilize the federal debt to GDP ratio. Currently, Moody's holds the U.S. government's Aaa rating with a "negative" outlook, signaling that a rating review would likely yield a cut.
After the election returns put Obama in the White House for a second term as president, the agency is maintaining its language on the government's debt outlook and emphasizing that it would cut ratings were lawmakers to broker a deal that doesn't provide a credible path to debt reduction.
In fact, 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.
Interestingly, as in its September assessment, Moody's sees the prospect of a ratings benefit if the U.S. were to fall off the fiscal cliff.