Moody's Investors Service on Tuesday said it would likely cut its 'Aaa' rating on US government debt, probably by one notch, if federal budget negotiations fail.
If the highly partisan Congress does not reach a budget deal, about US$1.2 trillion in spending cuts and tax increases will automatically kick in starting January 2, a scenario that's been called the "fiscal cliff", because it is likely to send the economy back into recession and drive unemployment up.
The Republican speaker of the House of Representatives John Boehner said Tuesday he's not confident Congress can reach a budget deal and avoid the downgrade.
Boehner said the Senate needs to act and President Barack Obama needs to show some leadership.
Any real negotiations are not expected until after the November presidential elections.
A year ago, Moody's cut its outlook on US debt to "negative", which acts as a warning that it might downgrade the rating, after partisan wrangling over raising the US debt limit led the nation to the brink of default.
Rival agency Standard & Poor's took the drastic step of stripping the government of its 'AAA' rating on its bonds around the same time. Fitch Ratings issued a warning of potential downgrade.
In its report Tuesday, Moody's said it is difficult to predict when Congress will reach a deal on the budget, and it will likely keep its current rating and "negative" outlook until the outcome of the talks is clear.
Boehner reminded reporters that the House has passed legislation to both avoid the automatic, across-the-board spending cuts next year and to renew the Bush-era tax cuts for one year. The Senate, however, has deadlocked over taxes and failed to address the across-the-board cuts.
"On both of these, where's the president, where's the leadership?" Boehner said.
Obama has called for replacing the across-the-board spending cuts with a combination of tax hikes and cuts elsewhere in the budget, but Republicans have repeatedly rejected his call for higher taxes on higher earners.
Moody's also noted that the US government will likely again reach the debt limit by the end of the year, which means another round of negotiations in Congress on raising the limit if the US is to keep paying its bills.
"Under these circumstances, the government's rating would likely be placed under review after the debt limit is reached, but several weeks before the exhaustion of the Treasury's resources," Moody's analyst Steven A. Hess said in his report.
Despite the rating cut last year from S&P and the warnings from Moody's and Fitch, the U.S. has been able to continue borrowing at very low rates. That's because investors are still buying US government bonds, as economic turmoil in Europe and uncertainty in other parts of the globe have left US debt and US dollars looking like safe bets.
In contrast, bond investors demand high rates from troubled countries like Spain and Italy.
The stock markets plunged when the downgrade happened in August 2011, but Moody's warning onTuesday did little to ruffle traders.
The Dow was 67 points an hour before market close on Tuesday.