July 19, 2011 / 6:07 PM / 9 years ago

Exclusive - U.S. backup debt plan doesn't support rating-Moody's

NEW YORK (Reuters) -

U.S. Senate Minority Leader Mitch McConnell (R-KY) makes a point about his meeting with President Barack Obama regarding the country's debt ceiling, during a news conference at the Capitol in Washington May 12, 2011. REUTERS/Jonathan Ernst

NEW YORK, July 19 (Reuters) - A backup plan to raise the U.S. debt ceiling and avoid imminent default could still lead to a downgrade of the country’s ratings in the next year or so, Moody’s said on Tuesday, highlighting the plan’s failure to substantially reduce the deficit.

The back-up plan offered by Senator Mitch McConnell, which is increasingly seen as a “Plan A” in Washington, would avoid any immediate downgrade of the coveted U.S. triple-A rating, Moody’s analyst Steven Hess told Reuters in an interview.

“But the numbers that are being discussed in terms of any possible deficit reduction coming out of this plan don’t seem to be very large,” Hess said. “Therefore, this plan might result in a negative outlook on the rating.”

A negative rating outlook usually means a downgrade is likely in 12 to 18 months.

McConnell’s plan, which is being negotiated with Senate Majority Leader Harry Reid, would authorise President Barack Obama to raise the debt limit in three increments, totalling $2.5 trillion — without any mandatory spending cuts — provided Obama’s fellow Democrats go along with it.

The plan would avoid a feared technical default by the U.S. Treasury but would not eliminate the periodic uncertainty related to the debt ceiling, Hess said.

“That event risk would still be there because the debt limit would have to be raised again a couple of times before the end of 2012,” he said.

The plan would also include about $1.5 trillion in deficit-reduction measures, which Hess said might still cause Moody’s to put a negative outlook on U.S. ratings.

Hess said a “much larger amount” worth of deficit-reduction measures would be necessary for Moody’s to affirm U.S. ratings with a stable outlook.

Asked about the ideal size of those deficit-reduction measures, Hess said $4 trillion “could lead us to affirm the rating at Aaa with a stable outlook, if those measures were actually adopted.”

“I’d rather not opine on the numbers in between,” he said.

Editing by Leslie Adler

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