WASHINGTON — Rating agency Moody's upheld its triple-A rating for the United States on Tuesday after Congress passed new legislation to raise the debt ceiling that averted a possible default.
But Moody's added a "negative outlook" on the grade, saying a historic downgrade could still come if fiscal discipline weakens or economic growth deteriorates significantly.
Moody's had warned of a possible downgrade in July due to fears that the government could be forced to default on its debts without a hike in its $14.3 trillion borrowing ceiling by August 2.
After a mad rush to compromise in Congress over the weekend, President Barack Obama signed legislation Tuesday that raised the ceiling and also put forth a plan to slash the country's deficit over the next 10 years.
"The initial increase of the debt limit by $900 billion and the commitment to raise it by a further $1.2-1.5 trillion by yearend have virtually eliminated the risk of such a default," Moody's said.
Moody's called the deficit plan "a first step" toward cutting the deficit to a level that will keep US finances in line with AAA parameters over the long run, echoing Obama's own warnings that the deal was only the start of a lengthy process to cut the deficit and spur job growth.
But the ratings agency labeled the complicated framework for the cuts "untested," noting that "attempts at fiscal rules in the past have not always stood the test of time."
Adding a negative outlook to the rating, Moody's said, highlights the risks if fiscal discipline breaks down, further deficit cutting measures are not adopted in 2013, the economy significantly weakens further or if the government's borrowing costs shoot up unexpectedly.
It said it expected the United States to cut its debt-to-GDP ratio, now nearing 100 percent, to 73 percent by 2015.
"Measures that further reduce long-term deficits would be positive for the rating; a lack of such measures would be negative," Moody's said.