Moody's Investors Service said today it would likely cut its "Aaa" rating on US government debt, probably by one notch, if federal budget negotiations fail. If the highly partisan Congress does not reach a budget deal, about $1.2 trillion in spending cuts and tax increases will automatically kick in starting Jan. 2, a scenario that's been called the "fiscal cliff," because it is likely to send the economy back into recession and drive unemployment up.
In its report, Moody's said it is difficult to predict when Congress will reach a deal on the budget, and it will likely keep its current rating and "negative" outlook until the outcome of the talks is clear. Any real negotiations are not expected until after the November elections. A year ago, Moody's cut its outlook on US debt to "negative," which acts as a warning that it might downgrade the rating. Rival agency Standard & Poor's took the drastic step of stripping the government of its "AAA" rating on its bonds around the same time. Fitch Ratings issued a warning of potential downgrade.