U.S. Credit Rating Unaffected by Super Committee Failure, For Now

The failure of the Super Committee to reach a budget deal wouldn't immediately affect the U.S. credit rating, according to Moody's Investors Service, Standard & Poor's Ratings Services and Fitch Ratings, but the rating agencies are keeping a watchful eye on developments.

Moody's Says Outlook Remains Negative

Moody's warned Wednesday that its top credit rating for the U.S. will be jeopardized if further deficit reduction to reverse the country's upward debt trajectory cannot be implemented.

The government's Aaa bond rating is unaffected by the lack of a deficit reduction agreement that triggered the automatic spending caps, which will kick in January 2013. This is expected to reduce the deficit by $1.2 trillion over a period of 10 years.

"Although the committee could have proposed considerably more than $1.2 trillion in deficit reduction measures, which would have been positive for the government's creditworthiness, its failure to do so does not decrease the amount of deficit reduction already legislated," Moody's said.

The $1.2 trillion includes about $1.0 trillion in spending cuts, which is below the $1.1 trillion Obama proposed in his 2012 budget plan in February, plus about $200 billion in interest savings because of lower debt levels. Of the spending cuts, about half would come from defense spending, with the majority of the remainder coming from discretionary spending programs, but a portion from payments to Medicare providers and insurance plans.

Moody's currently has a negative outlook on the U.S. rating. The agency believes the Super Committee impasse lowers the probability that further deficit reduction measures will be adopted before the November 2012 elections.

"While a change in the composition of the spending cuts would not be a major rating consideration, a reduction in the total amount that would increase the projected increase in federal debt over the coming decade could have negative rating implications," Moody's said in a statement.

Whether the Bush-era tax cuts are extended, as well as how entitlement programs are handled going forward, will be major questions on the deficit that will affect how its rating is handled.

Standard & Poor's Reaffirmed its August Downgrade

Standard & Poor's announced shortly after the Super Committee admitted defeat that the agency will not perform a further downgrade. This is based on the expectation that the caps on discretionary spending as laid out in the Budget Control Act of 2011 will remain in force. If these limits are eased, downward pressure on the ratings could build.

"The Fiscal Committee's inability to agree on fiscal measures that would stabilize U.S. government debt as a share of GDP is consistent with our Aug. 5 decision to lower our rating to AA+," Standard & Poor's said.

Standard & Poor's downgraded the nation's credit rating for the first time in its history in August.

Fitch Could Soon Put U.S. Debt on Negative Watch

Fitch affirmed the U.S. AAA sovereign ratings with a Stable Outlook on Aug. 16, but commented that it would update its U.S. economic and fiscal projections in light of the work of the Super Committee. The agency also said that failure by the Super Committee to reach an agreement would likely result in a negative rating action -- most likely a revision of the rating Outlook to Negative, which would indicate a greater than 50 percent chance of a downgrade over a two-year horizon. Less likely would be a one-notch downgrade.

The agency believes that the failure of the Super Committee to reach an agreement underscores the challenge of securing the political consensus on how to reduce the federal budget deficit and place U.S. public finances on a sustainable path over the medium-term.

Fitch announced it expects to conclude its review of the U.S. sovereign rating by the end of November.