Moody's warning on the U.S. credit rating: A bit of payback?

Even since Standard & Poors warned Britain about its credit rating last May, I've been wondering when one of the credit rating agencies would take aim at the U.S. and its gaping federal budget deficit. Moody's (MCO) did just that on Reuters Television Thursday, when it said if the U.S. doesn't reduce its deficit spending to manageable levels in the next three to four years, its top AAA rating could be lost.

We're already seeing a move away from the dollar, so if Moody's were to carry out this threat, that movement would turn into an avalanche. That's not a big problem if the only products you buy are made in the U.S. with raw materials from the U.S., but any imported items would become dramatically more expensive. Of course, it's hard to find entirely U.S.-made products. And don't forget the price of oil, which costs more as the dollar falls in value because most oil is priced in dollars. In turn, that raises costs for almost all U.S. manufacturing.

So, if Moody's, S&P (MHP) or Fitch were to change its AAA rating on U.S. bonds, you can expect a major economic storm. Just threatening to do so publicly can only help to increase the movement away from the U.S. dollar. I can only wonder if it's partial payback for the threat to reduce the influence of credit rating agencies.

However, there's truth behind Moody's warning (and the credit agencies have been taking plenty of flack for what seems to some critics as turning a blind eye to the scale of federal budget problems). The U.S. government posted a deficit of $1.417 trillion dollars for the year ended Sept. 30, and the White House forecasts deficits of more than $1 trillion through fiscal year 2011. That's certainly alarming news for the financial world and a good reason for Moody's to threaten to cut the U.S. rating.

Still, a key aspect of any rating, but particularly for one as important as the U.S. -- the world's benchmark sovereign -- is the credit agency's long-term outlook. And right now, Moody's has a stable outlook for the U.S., and it says it doesn't expect a change in the next 18 months.

So the big question becomes why did Moody's issue this warning on Reuters Television Thursday? To me, it sounds more like political posturing than a needed public spanking. I can only guess that there's some payback because the U.S. government has been moving away from depending on the credit rating agencies after they missed the boat on subprime mortgage-backed securities and the collaterallized debt obligations (CDOs) these securities were then bundled into. As those securities defaulted, it brought the world's economy to its knees.

Lately the U.S. government has called on firms like BlackRock (BLK) to help the feds assess complex securities at defunct Bear Stearns, at nearly collapsed AIG (AIG), and at mortgage giants Fannie Mae (FNM) and Freddie Mac (FRE). BlackRock also one of the fund managers in the Treasury Department's Public Private Investment Program.

So, perhaps Moody's is sending Uncle Sam a message: Include us or, we'll nail you.

Lita Epstein has written more than 25 books including Reading Financial Reports for Dummies.


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