Moody's: McConnell Backup Debt Plan Won’t Save Rating

A backup plan to raise the U.S. debt ceiling and avoid default could still lead to a negative outlook on the country's ratings, Moody's said, highlighting the plan's failure to substantially reduce the deficit.

The back-up plan offered by Senator Mitch McConnell would avoid any immediate downgrade of the coveted U.S. triple-A rating, Moody's analyst Steven Hess told Reuters in an interview, bringing relief to investors who fear an imminent downgrade of the coveted U.S. triple-A rating.

"But the numbers that are being discussed in terms of any possible deficit reduction coming out of this plan don't seem to be very large," Hess said. "Therefore, this plan might result in a negative outlook on the rating."

A negative outlook is a sign the rating may be downgraded in 12 to 18 months.

McConnell's plan, which is being negotiated with Senate Majority Leader Harry Reid, would include about $1.5 trillion in deficit-reduction measures.

Hess said a "much larger amount" of deficit-reduction measures would be necessary for Moody's to affirm U.S. ratings with a stable outlook.

In the most recent development in Washington on Tuesday, President Barack Obama supported efforts by a bipartisan group of U.S. senators with a more ambitious budget plan that includes $3.75 trillion in savings over 10 years.

Asked about the ideal size of the deficit-reduction measures, Hess said $4 trillion "could lead us to affirm the rating at Aaa with a stable outlook, if those measures were actually adopted."

"I'd rather not opine on the numbers in between," he said, also noting that Moody's does not have a view on whether that deficit reduction should be achieved via revenue increase or spending cuts.

McConnell's plan would authorize Obama to raise the debt limit in three increments, totaling $2.5 trillion -- without any mandatory spending cuts -- provided Obama's fellow Democrats go along with it.

The plan would avoid a feared default by the U.S. Treasury in August but would not eliminate the periodic uncertainty related to the debt ceiling, Hess said.

"That event risk would still be there because the debt limit would have to be raised again a couple of times before the end of 2012," Hess said.

Moody's currently has U.S. ratings on review for a possible downgrade to account for the growing risk that lawmakers fail to raise the debt ceiling before Treasury runs out of money to keep servicing its obligations.

It has said that, if the government avoids a default, it will likely affirm the country's rating at triple A but it will likely assign a negative outlook on the rating, unless there is a "substantial and credible" budget agreement to cut the deficit.