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Moody's says U.S. rating hangs on debt outlook

A Moody's sign is displayed on 7 World Trade Center, the company's corporate headquarters in New York, February 6, 2013. REUTERS/Brendan McD
A Moody's sign is displayed on 7 World Trade Center, the company's corporate headquarters in New York, February 6, 2013. REUTERS/Brendan McD

NEW YORK (Reuters) - Moody's Investors Service on Thursday said that future changes to the U.S. sovereign credit rating will turn on the expected debt trajectory, with more budget measures needed to shrink key debt ratios.

If the United States does not see high growth rates, the debt-to-GDP ratio could suffer, Moody's said in a statement.

"Therefore, further fiscal policy actions in coming months would be needed to ensure a decline in the debt ratios," the statement added.

"Any rating action in coming months will be predicated on the expected debt trajectory, which in turn will result from fiscal policy and the expected path of economic growth."

The statement laid out a series of budget milestones facing the United States in coming weeks, including the sequester, a package of automatic spending cuts set to kick in at the start of March, and the May 19 reinstatement of the country's debt limit.

That debt limit, Moody's said, is not a "fundamental factor" for the U.S. rating, though it does pose a small degree of event risk.

The United States bumped up against its $16.4 trillion debt ceiling on December 31. Lawmakers subsequently suspended the debt limit to allow time for more budget negotiations.

The U.S. rating, once seen as near-inviolable, has taken a beating in recent years. Standard & Poor's downgraded the United States to AA-plus in August 2011 over political wrangling that brought the world's biggest economy to the brink of default. The agency slapped on a negative outlook, as well, as a warning that the country wasn't off the hook yet.

The S&P downgrade occurred on August, 2011, when the yield on U.S. Treasury notes was 2.563 percent. Despite the downgrade, investors still scooped up the super-secure asset in a flight-to-safety trade that drove yields down to historically low levels, bottoming out at less than 1.4 percent last August.

Currently, the 10-year note is trading with a yield of 2.035 percent, below where it stood the day of the first downgrade.

While Fitch and Moody's both still rate the United States triple-A, both those agencies have negative outlooks, too.

Fitch has warned that it could cut this year should Congress reprise the acrimonious debt ceiling debates of 2011.

And Moody's statement of Thursday made clear that agency, as well, is keeping a close eye on budget deals that could cut into - or boost - the stock of government debt compared to the economy as a whole.

"It is still too early to tell when a clearer picture of the medium-term deficit and debt trajectories will emerge, but we will reassess the rating (Aaa, negative outlook) during the course of this year," the statement said.

(Reporting By Luciana Lopez and Daniel Bases; Editing by Chizu Nomiyama and David Gregorio)

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