Moody’s ratings agency warned Thursday that it probably would have to downgrade the U.S. government’s debt rating unless the White House and Congress work out a “credible agreement on substantial deficit reduction” by the middle of next month.
In its stark statement, Moody’s - one of the three big ratings agencies that help determine how easy it is for the government to borrow money - said the fight over raising the debt ceiling is worse then expected, and that’s increased the risk that the government will default on its debt.
Just as significantly, the agency said if lawmakers miss this chance to lower deficits, then no deal will get done before the 2012 elections. So Moody’s set a mid-July deadline for progress on a deal, or else it said a downgrade of the U.S. rating “is likely.”
The warning follows the decision by Standard & Poor’s in April to lower its outlook on U.S. debt from stable to negative.
“This report makes clear that if we let this opportunity pass without real deficit reduction, America’s financial standing will be at risk,” said House Speaker John A. Boehner, Ohio Republican. “A credible agreement means the spending cuts must exceed the debt-limit increase. The White House needs to get serious right now about dealing with our deficit and debt.”
The House earlier this week, in an overwhelming vote, defeated a bill that would have raised the debt ceiling by more than $2 trillion. The move was designed to show President Obama that any debt increase will have to be accompanied by spending cuts.
Federal debt stands just beneath the $14.294 trillion limit allowed by law, and the Treasury Department is using extraordinary methods to keep from crossing the line. But those tools will only last until Aug. 2, and if the limit isn’t raised by then, the government would have to suspend nearly half of its payments.
Shortly before the Moody’s warning, Mr. Boehner demanded that Mr. Obama himself offer a plan for debt reduction that could serve as the basis for talks.
“If the White House wants to get this done, it’s time for them to step up to the plate and get serious about it,” he said.
Mr. Obama two months ago tapped Vice President Joseph R. Biden to lead talks with congressional leaders on a broad debt-reduction plan, and Mr. Obama set an end-of-June deadline.
But this week, Mr. Biden is in Italy and the Senate is on a weeklong vacation, and next week the House is slated to take a vacation, leaving little time to reach an agreement by the end of the month.
The two sides said the talks are going well, but they have yet to tackle the big sticking points.
Republicans insist a deal should center on major spending cuts, while Democrats say tax increases also need to be part of the final package.
Leaders of both parties, though, say they will not accept default.
Treasury Secretary Timothy F. Geithner briefed Republican freshmen at the Capitol on Thursday for more than an hour on the debt-limit situation, and while he slipped out of the meeting without talking to reporters, the lawmakers said they are having an open dialogue about how to get a deal done.
Still, House Republican freshman Rep. Diane Black of Tennessee said the group asked Mr. Geithner for the administration to come up with a detailed debt-limit plan that could be scored by the independent Congressional Budget Office.
“It’s awfully difficult to talk and have a conversation about what we are able to negotiate between the two [sides] if there’s not a plan,” Mrs. Black said.
Some key Republicans have said Medicare should be among the spending reductions, but that’s a major sticking point for Democrats.
“A compromise that both prevents a catastrophic default on our obligations and significantly reduces the debt is within reach, but only if Republicans stop insisting on unattainable, ideological goals like their extreme plan to dismantle Medicare,” said Sen. Charles E. Schumer, New York Democrat.
House Democrats met with Mr. Obama on Thursday and reiterated their opposition to including the plan by Rep. Paul Ryan, Wisconsin Republican and Budget Committee chairman, to turn Medicare into a voucherlike program for those under 55 years of age, where they would choose a private plan and the government would pay the insurer for coverage.