Moody's Reveals U.S. Debt Downgrade Landmines

NEW YORK (TheStreet) -- Ratings agency Moody's (MCO) has outlined why it may downgrade the U.S. government's debt rating by 2014, citing the nation's debt to gross domestic product [GDP] ratio's and the risks that Congress cannot agree to a new federal budget.

On Tuesday, Moody's said it may downgrade the U.S. debt rating from Aaa - its highest rating -- to Aa1 by 2014 if budget negotiations during the 2013 Congressional legislative session fail to stabilize the federal debt to GDP ratio.

Currently, Moody's holds the U.S. government's Aaa rating with a "negative" outlook, signaling that a rating review would likely yield a cut.

If Congressional negotiations lead to a debt to GDP stabilization over the medium term, Moody's says, "the rating will likely be affirmed and the outlook returned to stable, says Moody's," in its updated outlook.

The wording also indicates that economic shocks of a "fiscal cliff" - mandated federal budget cuts if Congress can't come up with a budget deal -- or a harsh budget deal would not lead to a downgrade regardless of the impact to the U.S. economy.

The only scenario that would likely lead to Moody's temporary maintenance of a negative outlook the U.S. government, "would be if the method adopted to achieve debt stabilization involved a large, immediate fiscal shock--such as would occur if the so-called "fiscal cliff" actually materialized--which could lead to instability," the agency said.

The Aaa rating, with its negative outlook, will be maintained until the 2013 Congress finalizes either a new budget deal or cements a standoff. The rating outlook also assumes a relatively orderly process for the increase in the statutory debt limit as the U.S. once again nears a new debt limit.

Last August, Standard & Poor's cut the U.S. government's rating from AAA, citing failed budget negotiations and the uncertainty posed by a last minute deal to increase the debt limit, which staved off a technical default.

--Written by Antoine Gara in New York