The credit rating agency Moody’s is in a very delicate position. Its arch rival, Standard & Poor’s, was recently charged by the U.S. Department of Justice alleging that S&P committed mail and wire fraud by defrauding investors with faulty ratings. Moody’s was not charged, but there are a lot of questions about why it was left out of the investigation. At the same time, Moody’s is responsible for judging the creditworthiness of the U.S. government’s debt. There is little wonder that the rating agency is being very transparent in the benchmarks it is using.
Moody’s current rating for U.S. debt is Aaa (negative), which means that it could be downgraded. Unlike Paul Krugman and others who want the nation to issue more debt to attempt to spur economic activity, Moody’s wants the U.S. to reduce its debt-to-GDP ratio to improve its credit quality. In a detailed analysis, Steven A. Hess, Moody’s Senior Vice President, lays out what the agency is watching and the metrics it will use to judge the actions of Congress and the President.
First Hess describes how the recent tax increases on those earning $400,000 per year or more does not raise enough revenue to square up fiscal issues:
The American Taxpayer Relief Act (ATRA), passed on 1 January, was the first significant fiscal measure of the year. We expect the various tax measures in the act, including an increase in the income tax rate for individuals with annual income of $400,000 and above, to raise government revenue by more than $600 billion over the next 10 years. However, we do not expect this amount to be sufficient to ensure a decline in the ratio of federal government debt to GDP. The Congressional Budget Office (CBO), for example, projects that this ratio, after falling somewhat in the middle of the decade, will begin to rise again at the end of the decade. Therefore, further measures are required to ensure a downward debt trajectory.
Moody’s reminds us of how the basic procedures for developing a budget have not been followed: