Moody’s:If Tax-Cut Extensn Tempory,No Immed Sov Rating Impact

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–But Permanent Tax Cuts ‘Would Be A Definite Negative’
–Outlook For U.S. Sovereign Rating Remains ‘Stable’
–US Has Some Time To Deal With Its Debt Trajectory Situation
–Outlook for Near-Term Debt, Deficit Reductn Plan Adoption ‘Not Good’
–Pressures on Rating Wld Develop in M-T If It Appears US Does Nothing

By Yali N’Diaye

WASHINGTON (MNI) – Clearly, an extension of the tax cuts that had
been implemented by the Bush administration in 2001 and 2003 “is not
good” from a deficit/debt perspective, but such a measure, if temporary,
would not immediately jeopardize the U.S. sovereign rating,” Moody’s
lead analyst for the United States told Market News International
Monday.

He cautioned, however, that, “A permanent extension of the tax cuts
would be a definite negative.”

And over the medium term, pressures on the sovereign rating could
develop if the country does not adequately address its debt trajectory.

Yet there is still some time to deal with this issue, Hess told
MNI.

He noted in an article titled “Debt Commission Chairs’ Proposals
Would Improve U.S. Debt, but Adoption Unlikely,” published earlier
Monday that, “Unlike other large Aaa-rated economies such as the UK or
Germany, the U.S. does not yet have a plan to stabilize or reverse the
trajectory of increasing indebtedness.”

He added that despite the National Commission on Fiscal
Responsibility and Reform’s proposals presented last week to correct the
fiscal deficit and debt ratios of the United States, the important thing
for the credit rating is “actual adoption of a plan” by the
administration.

But he then told MNI, “Right now, the outlook for actual adoption
of a plan in the near term is not good, although the dynamic of the new
Congress remains to be seen.”

Congress must act on the Bush tax cuts or see them disappear at the
end of the year.

“The deficit as a percentage of GDP is set to decline in any case,
but the magnitude of the decline under assumptions of relatively subdued
economic growth is not sufficient to stabilize or reverse the debt
trajectory,” he added.

Besides, “The extension of the tax cuts is clearly not good from a
deficit/debt perspective,” Hess told MNI, noting, however, that the
timing of their expiration in itself was not helping due to the
“sub-par” economic conditions.

So as, “Economic growth is an important factor in the government’s
ability to deal with the deficit question over time,” he continued, “a
temporary extension of the tax cuts, while undesirable from the debt
perspective, would not have immediate impact on our rating.”

That said, “it would clearly make the task of finding measures to
reduce the deficit even more urgent and more challenging.”

Still, the U.S. rating is not at risk in the near term.

“The U.S. has some time to deal with this situation, so the rating
outlook remains stable,” Hess said, referring to the need to reverse or
stabilize the debt trajectory of the country.

The administration’s Mid-Session Review for the 2011 budget
projects that interest payments relative to government revenue would
rise to 15.4% in 2015 and 17.6% in 2020. This compares with 8.6% in the
past fiscal year.

Lawmakers have returned to Washington this week for Congress’s Lame
Duck session with the central item on the agenda being the fate of the
Bush tax cuts of 2001 and 2003. President Obama, Democratic and
Republican leaders have floated various proposals as all sides prepare
for the final negotiations.

Renewing all Bush era tax cuts for a decade would cost about $4
trillion — far more than any spending cut proposal discussed by either
party.

** Market News International Washington Bureau: 202-371-2121 **

[TOPICS: M$U$$$,MGU$$$,MR$$$$,MX$$$$,MFU$$$,MCU$$$]

4 Comments

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