Moody's Threatens To Play Follow The Leader

As expected now that Standard & Poor's broke the credit downgrade ice, others are threatening to fall in line.  Moody's, who just last week declared that the budget deal saved the US from downgrade, is now warning that it might downgrade the U.S. government's credit rating if its planned measures to reduce its budget deficit turned out to be not "credible" after all.

Moody's analyst Steven Hess sounded a note of caution about Moody's rating of the U.S., repeating that the August 2 plan to cut deficits by $2.1 trillion was positive for the U.S. credit standing, but not enough to keep its rating on a stable outlook.

A negative outlook is a sign the rating may be downgraded in 12 to 18 months.

Moody's had earlier put the US on "review for downgrade" on July 13 before removing the ratings watch and affirming the AAA rating on August 2, after the U.S. Congress passed a measure cutting the fiscal deficit and raising the statutory borrowing limit.

"If the process for further deficit reduction that is included in the budget control act produces results that are not really credible, that combined with the economic performance could potentially cause an early move on the rating," Hess told Reuters in an interview.

Even the $917 billion in savings that have already been agreed by Republicans and Democrats are not guaranteed in the long term, Hess said.

A negative outlook by Moody's is a sign the rating may be downgraded in 12 to 18 months.

Hess also said he was worried that the amount scheduled to be  cut in the compromise is insufficient.

"But the numbers that are being discussed in terms of any possible deficit reduction coming out of this plan don't seem to be very large," Hess said"Therefore, this plan might result in a negative outlook on the rating."

The bottom line is that is all going to get worse before it gets better.  This is more than a downgrade of our credit rating, the S&P actions (today they also downgraded Fannie Mae​ and Freddie Mac), and the Moody's threats are indicative of a lack of confidence in America's leaders, that can't change until 2012.