NEW YORK (MNI) – The following is the text of a statement by
Moody’s Wednesday:

The Aaa government bond rating for the United States is unaffected
by the lack of a deficit reduction agreement by the Joint Select
Committee on Deficit Reduction, Moody’s Investors Services says, citing
the $1.2 trillion in deficit reduction to come from automatic spending
caps beginning in January 2013. The lack of an agreement by the
committee does not change the US fiscal outlook from what was legislated
in the Budget Control Act of August 2, according to Moody’s, echoing
comments made on November 1. The rating agency said, however, that the
committee outcome indicates that significant deficit reduction measures
are unlikely to be adopted before the November 2012 elections. Moody’s
currently has a negative outlook on the US rating given the need over
time for further deficit reduction to reverse the country’s upward debt
trajectory.

The Budget Control Act included about $900 billion in deficit
reduction, to be followed by at least $1.2 trillion coming from either
legislation proposed by the committee or automatic caps
(“sequestration”) on spending that become effective beginning in January
2013. 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.

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. The sequestration measures that
become effective in 2013 include about $1.0 trillion in spending cuts
below what is currently projected, 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. Some members of Congress
appear to favor changing the mix of these spending cuts to lessen the
impact on defense spending.

Moody’s believes that over time further deficit reduction measures
will be necessary to reverse the upward debt trajectory — the principal
reason behind the negative rating outlook assigned on August 2. While
the committee outcome does not directly affect the fiscal outlook, it
lowers the probability that further deficit reduction measures will be
adopted before the November 2012 elections.

Without further measures, one of the most important medium-term
questions concerning the fiscal outlook is the level of personal income
tax rates beginning in 2013. The so-called “Bush tax cuts” will expire
at the end of 2012, meaning that tax revenues will rise significantly at
that time if there is no change in the law. If this indeed occurs, the
upward trend in the ratio of federal debt to GDP could well be reversed
in the middle of the decade, assuming that economic growth is maintained
at a moderate rate. Over the longer term, entitlement programs are also
crucial to the fiscal outlook.

In the short term, the committee outcome may also have implications
for other fiscal measures that would affect the deficit and debt levels
in 2012, because the same divisions that prevented a deficit agreement
may continue to affect the legislative environment. Other potential
measures include an extension of the temporary payroll tax reduction and
extended unemployment benefits, which expire at the end of this year.

The administration has proposed extending these measures through
2012, which would increase the budget deficit in the coming year but not
the long-term debt trajectory. An increase in payroll taxes and a
reduction in unemployment benefits next year could have an important
effect on economic growth because of the effect on personal consumption
expenditure, which in recent months has shown some strengthening. Lower
economic growth would affect overall government revenues.

** Market News International New York Newsroom: 212-669-6430 **

[TOPICS: MR$$$$,M$U$$$,MFU$$$,M$$CR$]