Moody's may not take S&P route on US

While rating agency Standard & Poor's (S&P) has downgraded the US credit rating, Moody's might not follow in its step, unless the situation deteriorates significantly, says Moody's Indian associate Icra.

“Any immediate or near term action by Moody’s (on the US credit rating) may be unlikely unless there is any significant negative development,” Icra managing director Naresh Takkar told Business Standard.

He said Moody’s recently confirmed the AAA government bond rating for the United States. However, the rating outlook has changed to negative, which implies that there may be a possibility of a negative rating action by Moody’s during the next 12-18 months.

However, the negative action may happen only if there was evidence of slippage in the fiscal discipline in the near-term, lack of concrete measures towards fiscal correction by the US authorities in the medium-term, weakening of the economic conditions or a sharper-than-expected rise in the funding costs of the US government.

“It will be difficult to speculate on Fitch’s rating action, which is still pending,” said Takkar.

While refusing to speak about S&P’s actions, the Icra MD said his view is that the rating agency's move on the US was primarily predicated on its assessment on the lack of political cohesion in dealing with the pressing fiscal problem in the US in the near-term, rather than a specific estimate of the country’s debt level.

“Recent events have highlighted the difficulty that the Administration is facing in achieving consensus on the mode of fiscal tightening, suggesting that deficits may remain large in the medium term, exerting pressure on the considerable debt burden. The fact that the US economic prospects appear clouded would have also weighed on S&P’s judgment.”

On the fears of a double-dip recession in the US, Takkar said recent data releases have presented a somewhat conflicting picture regarding the underlying economic growth momentum in the US. “QE2 is widely believed to have injected liquidity without meaningfully stimulating economic growth in the US. With limited potential for either fiscal or monetary policies to stimulate the US economy, growth is likely to remain muted, at best, in the near term.”

He said the US economy continues to face significant challenges with persisting high levels of unemployment, slow economic growth and continuing high debt levels. “Although the extent of deleveraging in the recent past has been limited, deleveraging by households and attempts at fiscal consolidation by the government have nonetheless had an impact on the level of aggregate demand.”

Takkar said the US faces a conundrum on the fiscal front. While fiscal tightening is required to stabilise the debt stock, it threatens the fragile economic recovery. He said the S&P action on US is a wake up call for all global economies and not just for India.

“Even as the Indian debt-to-GDP ratio has improved in the past few years, it is essential to continue to focus on maintaining economic growth while not compromising on fiscal prudence,” he added.

Takkar said the Indian government will need to take some hard decisions on addressing some of the structural factors relating to widening of the tax base and controlling subsidy commitments to keep the fiscal deficit under check and ensure that debt remains at sustainable levels over the long term.