Moody's: Boehner and Reid bills won't cut it

@CNNMoney July 29, 2011: 6:57 PM ET

NEW YORK (CNNMoney) -- Neither of the debt ceiling bills before Congress would meaningfully alter the country's debt trajectory and thus won't bolster the United States' chance of preserving its AAA rating, a key rating agency said Friday.

"Reductions of the magnitude now being proposed, if adopted, would likely lead Moody's to adopt a negative outlook on the AAA rating," Moody's Investors Service said.

A "negative outlook" would indicate the possibility that Moody's would downgrade the country's sovereign credit rating within a year or two.

The debt ceiling bill proposed by House Speaker John Boehner and the one offered by Senate Majority Leader Harry Reid would each reduce the country's deficits over 10 years by a little more than $900 billion, primarily by capping discretionary spending, excluding costs in Iraq and Afghanistan.

Neither bill includes proposals to raise more revenue or tackle the entitlement programs -- namely Social Security, Medicare and Medicaid.

Boehner, Reid: Where they meet

The cuts proposed by both bills are a far cry from the $4 trillion "grand bargain" plans -- such as the one put forth last year by President Obama's bipartisan debt commission -- that addressed the entire federal ledger.

Moody's said a downgrade could come sooner if there isn't some acceleration in economic growth in 2012, and if no substantial deficit reduction measures are adopted. Higher-than-expected interest costs on U.S. debt might also hasten a downgrade.

Moody's also weighed in on the prospect of a downgrade due to default if lawmakers fail to raise the debt ceiling by Tuesday. That's when Treasury has said it will no longer be able to continue to pay all the country's bills in full and on time.

The agency stressed it would only render the country in default if it missed interest or principal payments to bond investors -- a scenario it considers unlikely. Should that happen, however, it would downgrade U.S. credit.

The agency also addressed one of the crucial issues dividing lawmakers: How long to extend the debt ceiling.

Moody's said an increase of more than six months "would likely lead to a confirmation of the rating at AAA because the risk of default was no longer present."

In mid-July, Moody's announced it was placing the U.S. credit rating under review for a possible downgrade. Its rival, Standard & Poor's, meanwhile, announced it might downgrade the United States within 90 daysTo top of page

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