This Day On The Street
Continue to site
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

Rating Agencies Know a Fate Worse Than the Fiscal Cliff

NEW YORK ( TheStreet) -- With four days left before the federal government heads over the so-called fiscal cliff and new reports that the U.S. Treasury may hit a 'debt ceiling' by the New Year, investors have a lot to worry about.

Lingering outside the daily political ping pong between Democrats and Republicans are Wall Street ratings agencies. As Moody's (MCO - Get Report), Standard & Poor's and Fitch Ratings act as quiet bystanders to ongoing budget negotiations, investors may do well to consider them as a key risk factor as lawmakers either pull together a last-minute deal before the cliff deadline or allow the U.S. economy to hurdle over it.

Notably, Moody's, S&P and Fitch have spent recent months telegraphing to investors how they would react to a multitude of different budget scenario's. Interestingly, while heading over the cliff would appear to be the worst possible outcome for investors, ratings agencies outline why they think differently.

Moody's said in recent review of the U.S. government's debt rating that a last minute deal, which kicks the can down the road on revenue increases, spending cuts, or both, would be the worst possible outcome. Meanwhile, Fitch sees a negotiation that spills into 2013 as reason to reconsider the government's rating.

Unfortunately for investors both scenario's appear to be in the cards, given the limited amount of time Congress has to negotiate a so-called Grand Bargain this year.

On Thursday, Senate Majority Leader Harry Reid said it "looks like" Congress wouldn't be able to broker a cliff-avoiding deal by year-end. With House Majority leader John Boehner sidelines by a Republican congressional camp that couldn't approve his "Plan B" budget deal, the dimming prospect of a Senate leaves lawmakers with few options.

President Obama said on Dec. 21 that in the absence of a deal, Congress should at least put together a bill to maintain tax cuts on those earning less than $250,000 a year, while extending unemployment benefits for roughly 2 million workers.

According to rating agencies, heading over the fiscal cliff might have a similar impact for the U.S. government as a so-called Grand Bargain, which could capture the revenue increases Democrats are pining for and the spending cuts Republicans continue to hold out on.

Moody's said in September 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.

Interestingly, Moody's sees the prospect of a ratings benefit if the U.S. were to fall off the fiscal cliff.

"[If] the "fiscal cliff" strategy is adopted to achieve debt stabilization - involving a large, immediate fiscal shock that would improve government finances in the short term but likely result in recession and higher unemployment - we would maintain our Aaa rating with a negative outlook and await evidence that the economy could rebound before considering a return to a stable outlook," wrote Steven A. Hess and Bart Oosterveld of Moody's in a November reiteration of the agencies ratings review.

In contrast, were lawmakers to broker a fiscal cliff deal that kicks the can down the road on debt reduction without outlining specific budget stabilization plans, Moody's hints at a possible downgrade prior to 2014.
1 of 2

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Real Money

More than 30 investing pros with skin in the game give you actionable insight and investment ideas.

Product Features:
  • Access to Jim Cramer's daily blog
  • Intraday commentary and news
  • Real-time trading forums
Only $49.95
14-Days Free
14-Days Free
MCO $99.05 0.00%
AAPL $110.38 0.00%
FB $92.07 0.00%
GOOG $626.91 0.00%
TSLA $247.57 0.00%


Chart of I:DJI
DOW 16,472.37 +200.36 1.23%
S&P 500 1,951.36 +27.54 1.43%
NASDAQ 4,707.7750 +80.6910 1.74%

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs