America’s hold on AAA rating risks collapse next year

Wednesday, September 12, 2012
By Paul Martin

America’s hold on a AAA rating will collapse next year unless Washington takes measures to rein in the government’s debt, Moody’s has warned.

By Richard Blackden
11 Sep 2012

The credit rating agency delivered a stark warning that it will follow its rival, Standard & Poor’s, and strip the US of its top rating unless Republicans and Democrats reach an agreement that has proved beyond them over the last four years.

The ratio of America’s debt compared to the size of its economy will balloon to 73pc by the end of the current fiscal year on September 30, the Congressional Budget Office (CBO) has forecast. The CBO has warned it could spiral to 90pc by 2022 and higher still after that unless spending is cut and the amount raised in taxes is increased. The ratio averaged about 40pc for most of the period after World War Two.

Many analysts believe that a mix of cuts to mandatory spending programmes, such as Medicare and Medicaid, will be required alongside a jump in tax revenues. However, President Barack Obama’s first term has been marked by bitter disagreement between Republicans and Democrats over the issue.

Mr Obama’s latest budget offered little in the way of reform of such programmes, while Congressional Republicans ruled out tax increases in their proposal.
If “negotiations fail to produce a plan that includes such policies, we would expect to lower the rating, probably to Aa1,” analysts at Moody’s wrote in the report.

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