Moody's upgrades U.S. credit rating outlook as budget deficit falls

WASHINGTON -- The shrinking budget deficit and improving economy has led Moody's Investor Services to affirm the nation's AAA credit rating and upgrade the outlook for government debt to stable from a negative watch that could have led to a downgrade.

But Moody's warned that failure to address the long-term budget deficit "could put the rating again under pressure" down the road.

For the short term, however, the tax increases and automatic federal spending cuts that began this year have helped cause a "steep decline" in the budget deficit that warranted removing the negative outlook, Moody's said.

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"The U.S. budget deficits have been declining and are expected to continue to decline over the next few years," Moody's said Thursday.

"Furthermore, the growth of the U.S. economy, which, while moderate, is currently progressing at a faster rate compared with several AAA peers and has demonstrated a degree of resilience to major reductions in the growth of government spending," Moody's said.

The Congressional Budget Office has estimated that the 2013 federal budget deficit would be $642 billion, down from $1.1 trillion the previous year.

The reduction would lower the deficit to 4% of total economic output in 2013 from 7% the previous year. Moody's said that was a greater decline than it anticipated when placing the U.S. rating on a negative outlook in 2011.

The move Thursday by Moody's came after another leading credit rating company, Standard & Poor's, upgraded its U.S. outlook last month to stable from negative as well.

S&P, however, had downgraded the U.S. rating to AA+ in 2011 after the divisive debate over raising the debt limit.

Moody's and Fitch Ratings kept the U.S. at AAA status at the time but put the federal government on a negative outlook, which meant a downgrade could take place in three to five years.

Last month Fitch affirmed its AAA rating for U.S. debt but kept the rating on a negative watch, citing continued uncertainty about medium- and long-term deficit reduction measures as well as "a timely increase in the debt limit."

The improving deficit picture has pushed off the need to raise the debt limit until after Labor Day. The U.S. hit its $16.8-trillion debt limit in May, but the Treasury has been juggling the nation's finances to postpone the need to raise the limit.

Republicans want more budget cuts in exchange for another debt limit increase, while President Obama and Democrats argue the limit should be raised unconditionally because it pays for debts already authorized by Congress.

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