In new warning, U.S. told to act on debt limit quickly

Article by: JACKIE CALMES and CARL HULSE , New York Times
Updated: June 2, 2011 - 11:51 PM

Moody's said credit rating could be lowered if Congress can't reach an agreement soon.

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WASHINGTON - Moody's Investors Service warned Thursday that it may downgrade the U.S. government's sterling credit rating if Congress does not increase the nation's debt limit "in coming weeks," putting a spur to sputtering talks between party leaders and the White House on a plan to restore fiscal stability.

The warning, from one of the agencies whose assessments of creditworthiness help determine interest rates, amounted to a stern reminder from Wall Street to Washington that global financial markets are watching the budget battle closely and that a standoff or brinksmanship could have economic consequences.

Both sides seized on Moody's statement to reinforce their bargaining positions, with Republicans demanding that President Obama get more serious about deep spending cuts and Democrats saying that Republicans are risking a financial crisis in pursuit of an ideological agenda.

Moody's said a review of the credit rating was "likely" in July, given that "the risk of continuing stalemate has grown." Its warning followed a similar one from another major ratings firm six weeks ago, and it came as the administration met Thursday with both House Republicans and Democrats in search of a deal.

Treasury Secretary Timothy Geithner met on Capitol Hill with House freshmen, including Republicans who have suggested that they see little or no risk in a showdown over the debt limit. Citing the Moody's statement, Geithner urged them to support raising it or risk an economic crisis.

"We didn't create this mess," one Republican reportedly told Geithner.

Independent analyses have shown than more than half of the $14.3 trillion debt is from policies enacted during the past decade when Republicans controlled both the White House and Congress, and much of the rest from lost revenues and stimulus spending and tax cuts since Obama took office at the height of the financial crisis and recession.

Geithner, as he left the Capitol, told reporters: "I'm confident two things are going to happen this summer. One is we are going to avoid a default crisis. And we are going to reach agreement on a long-term fiscal plan."

Rep. Austin Scott, the Georgia Republican who is the leader of the freshman class, said after the meeting that House Republicans had a "fundamental" difference with Democrats on taxes: Instead of new tax revenues, the Republicans want additional tax cuts to increase economic growth. Still, he said, "I think we are all hopeful we will get to a resolution."

Earlier, Obama and Geithner met privately with House Democrats at the White House about debt-reduction matters, following a similar session Wednesday with House Republicans.

House Speaker John Boehner interpreted the Moody's report as bolstering his contention that "a credible agreement means the spending cuts must exceed the debt-limit increase." Moody's, however, made no mention of how a deficit-reduction agreement should be structured.

The Moody's report was unexpected. In April, Standard & Poor's lowered its outlook for the AAA rating on U.S. debt -- but not the rating itself -- to negative from stable.

Moody's cautionary note was more pointed in that it was pegged to the current political maneuvering over the debt limit, and it urged a resolution weeks sooner than the White House and congressional leaders were aiming for.

Its warning was two-pronged. First, Moody's said, if Congress does not increase borrowing authority in coming weeks, the nation's credit rating may be lowered "due to the very small but rising risk of a short-lived default." And second, Moody's said, whether the United States keeps its triple-A rating "will depend on the outcome of negotiations on deficit reduction."