PUBLISHED: 10:05 EST, 11 September 2012 | UPDATED: 20:58 EST, 11 September 2012
Obama, who will either be a lame duck president as America awaits President-elect Mitt Romney’s inauguration or a newly-elected two-term president, will have to reach agreement with Congress.
In a statement, Moody’s said that negotiations between on the 2013 budget, due to take place after the November election, need to reduce the high ratio of debt to gross domestic product (GDP).
‘If those negotiations lead to specific policies that produce a stabilisation and then downward trend in the ratio of federal debt to GDP over the medium term, the rating will likely be affirmed and the outlook returned to stable,’ the statement said.
‘If those negotiations fail to produce such policies, however, Moody’s would expect to lower the rating, probably to Aa1.’
That rating, a level below AAA, would be the equivalent of the rating that Standard & Poor’s gave the US last year when it downgraded the top-level rating following the acrimonious battle in Washington over raising the debt ceiling.
The credit downgrade, the first in American history, led to a stock market plunge.
At that time, Moody’s and the other leading credit rating company, Fitch Ratings, maintained the AAA level after Congress and the White House eventually agreed to an increase in the debt ceiling. Moody’s, however, altered its outlook to negative, meaning there was a danger of a future downgrade.
The US national debt went over $16 trillion at the end of August. It was $10.6 trillion when President George W. Bush left office in 2001 and $5.6 trillion at the end President Bill Clinton’s second term eight years before that.
America’s ratio of debt to GDP is now more than 100 per cent. The Congressional Budget Office (CBO) estimated last month that the budget deficit for the 2012 fiscal year, which ends on September 30th, will be about $1.1 trillion.
A slew of tax cuts introduced under President George W. Bush are due to expire at the end of the year and automatic spending cuts triggered. The CBO has said that this could shrink GDP by 2.9 per cent in the first half of 2013, causing a ‘significant recession’ and the loss of two million.