Unless the congress and president can reach an agreement by the end of the year to avoid the "fiscal cliff" of tax increases and sequestration, Moody's rating agency will downgrade the US Triple A designation.
The rating agency said on Tuesday it is considering joining its rival Standard & Poor's, which stripped the US of its top rating last year, if a deal is not reached by the end of 2013. The threat is likely to feed into election campaign concerns over the state of the economy and lift Republican hopes of a boost for Barack Obama's challenger, Mitt Romney, by focusing attention on the size of the national debt.
It also adds pressure on lawmakers in Congress to lay the groundwork for critical negotiations on fiscal policy that will begin almost immediately after the election on November 6.
The comments made clear that a deal to avert the so-called "fiscal cliff" - a series of tax increases and automatic spending cuts due in early January - may not be enough to prevent a downgrade, and that a broader agreement to shrink America's debt pile over the medium term would need to be crafted.
Budget negotiations next year "will likely determine the direction of the US government's Aaa rating", Moody's said, adding that it may cut the country's rating to Aa1 if the results were not satisfactory. "What we're looking for is a downward trajectory of the debt over the medium term," said Steven Hess, lead analyst for the US sovereign rating at Moody's in New York.
A Moody's downgrade, on top of S&P's controversial move in August 2011, would further taint the standing of US Treasury securities as the world's purest risk-free asset.
Most congressional leaders are pessimistic that a deal can be struck in a lame duck session of congress after the election. And there is no chance of any movement before the election.
The probability is, that the debt ceiling, the fiscal cliff, weak growth, and high unemployment will throw the US back into recession early next year. The paucity of leadership from the White House and Senate Democrats on the issue appears to doom us to an economic calamity.