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Wednesday, 12 September 2012

Moody’s Investor Service Warns That U.S. May Face Debt Downgrade

WASHINGTON — Congressional leaders dug in their heels on Tuesday against any quick deal to resolve a looming fiscal disaster before the election, even as a major ratings agency warned that it would downgrade the government’s debt if no solution was found by year’s end.
Democratic leaders have warned their own members to tone down any discussion of a short-term resolution to the “fiscal cliff,” betting that Republican fears over the January deadline will drive them to the negotiating table shortly after the November election.
Speaker John A. Boehner, reacting to the downgrade notice from Moody’s Investor Service, said it underscored the Republican position that the nation’s precarious fiscal condition could be addressed only by cutting government spending.
“The threat to American jobs comes not from action on our debt, but from inaction on our debt,” he said. “The president and his economic advisers have consistently perpetuated the myth that downgrades are caused by efforts to force the government to stop spending money we don’t have.”
The Moody’s warning comes a year after its rival, Standard & Poor’s, downgraded the United States’ credit worthiness after the protracted stalemate over raising the nation’s statutory borrowing limit.
Like S&P, Moody’s emphasized political dysfunction more than soaring government debt. The agency said Washington must come to agreement to head off billions of dollars in simultaneous tax increases and spending cuts scheduled to begin in January — and to put the government on a sustainable fiscal trajectory. Only then would the United States keep its AAA rating.
“If those negotiations lead to specific policies that produce a stabilization and then downward trend in the ratio of federal debt to G.D.P. over the medium term, the rating will likely be affirmed and the outlook returned to stable,” Moody’s said in a statement. “If those negotiations fail to produce such policies, however, Moody’s would expect to lower the rating.”
If no agreement is reached, all of the Bush-era tax cuts will expire in January, just as more than $1 trillion in automatic military and domestic cuts begin slicing spending. Numerous economists have warned that the hit to the economy will almost surely send the nation back into recession.
At the Democratic National Convention in Charlotte, N.C., Senator Richard J. Durbin of Illinois, the Senate’s No. 2 Democrat, suggested that Congress move now on a long-term framework that sets a target for deficit reduction and establishes the proportion of spending cuts, entitlement changes and revenue increases to get there. If an agreement on a broad outline could be reached, Congress should then push back the automatic tax hikes and spending cuts for six months, provided that revenue increases and spending cuts be enacted to pay for the delay.
The idea landed with a thud. “It isn’t as if people are lining up to sign up for it,” Mr. Durbin said Tuesday.
Republicans have been pummeling Democrats on the presidential and Congressional campaign trails about the fiscal cliff.
“We continue to want to provide solutions and resolve the differences here in Washington,” Representative Eric Cantor of Virginia, the House majority leader, said Tuesday on CNBC. “All there’s been over the last couple years is a one-way street.”
Mitt Romney and his running mate, Paul D. Ryan, have suggested that the bipartisan deal last summer that set up the automatic cuts was President Obama’s idea. Mr. Boehner has accused the president of failing to lead on the issue.
Democrats deny that, pointing to statements from Mr. Boehner and Mr. Ryan praising the deal when it was struck. Both men voted for it.
So far, Democrats do not appear troubled by the attacks. As Republican warnings over military cuts and tax increases grow louder, Democrats see their leverage growing stronger.
“Republicans talk a big game on defense — they just don’t want to pay for it,” said Representative Chris Van Hollen of Maryland, the ranking Democrat on the House Budget Committee. “They want to increase defense spending, but they don’t want to ask people like Mitt Romney to pay one more dime in taxes.”
If no deal is struck by Jan. 1, Mr. Obama can present Congress a retroactive extension of only the middle-class tax cuts, take it or leave it, Mr. Van Hollen said.
Representative Peter Welch, Democrat of Vermont, said, “Revenues should be part of any plan, and Democrats should not cave on that.”
With just 11 legislative days remaining before the election, once-uncompromising Republicans in Congress do appear to be reassessing their positions.
Earlier this year, House conservatives demanded a cap on domestic spending for the coming fiscal year that would be $19 billion below the level set by last summer’s budget deal. Even Senate Republicans balked. On Thursday, the House is expected to pass a measure keeping the government functioning well into next year at the spending level House Republicans found unacceptable in March, $1.047 trillion.
“My conservative friends in the Senate have taken a position that says that a clean $1.047 number is digestible, so for us to not take that position seriously would be for us not to recognize the reality of Washington today,” said Representative Tim Scott of South Carolina, who leads the Tea Party-infused Republican freshmen.
But some Democrats are getting nervous about the game of chicken in Washington. Senator Dianne Feinstein, Democrat of California, said the $109 billion in initial automatic spending cuts should be postponed for six months, then cut at least in half.
“I’m of the opinion that cutting haphazardly at a critical time in the economic progress of the nation is absolutely the wrong thing to do,” she said Tuesday
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Edited By Cen Fox Post Team

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