Moody's affirms US credit rating

Last updated 05:00 27/07/2013

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Moody's Investors Service upgraded the outlook for US government debt to "stable" from "negative" and affirmed the United States' blue chip Aaa rating.

The rating agency cited a surprising drop in the federal deficit - the difference between what the government collects in taxes and what it spends. The US government is on track to report its lowest annual deficit in five years.

Through the first eight months of the budget year, the deficit has totalled US$509.8 billion (NZ$645b), according to the Treasury Department. That's nearly US$400b lower than the same period last year.

The Congressional Budget Office forecasts the annual deficit will be US$670b when the budget year ends on September 30. That would be well below last year's deficit of US$1.09 trillion and the lowest since President Barack Obama took office. It would still be the fifth-largest deficit in US history.

The deficit hit a peak 10.1 per cent of gross domestic product - the broadest measure of the US economy - in the depths of the Great Recession in 2009. CBO expects the deficit to fall to 3.4 per cent of GDP in 2014 and 2.1 per cent in 2015.

Moody's had lowered the outlook to "negative" two years ago. But it never went as far as rival Standard & Poor's, which stripped the US of its top credit rating in 2011.

S&P last month upgraded its outlook for long-term US government debt but kept its rating at AA+, a notch below its top grade.

A stronger credit outlook and rating should allow governments to borrow at lower interest rates by signalling that their bonds are less risky. Weaker credit ratings should force them to pay higher rates.

But investors largely ignored S&P's downgrade in 2011. Stocks fell briefly and then rebounded. Yields on Treasurys later fell to record lows.

An improving economy and tax hikes and spending cuts that took effect this year have narrowed the government's budget gap.

Still, Moody's warned that the government needed to control longer-term deficits as Baby Boomers age and begin to collect Social Security and Medicare. Failure to do so "could put the rating under pressure again."

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- AP

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