Moody's warned Tuesday it could strip the United States of its coveted triple-A credit rating if Congress fails to produce a budget that will bring down the federal debt burden.
"Budget negotiations during the 2013 Congressional legislative session will likely determine the direction of the U.S. government's Aaa rating and negative outlook," the ratings firm said in a statement.
If the negotiations lead to specific policies that produce a stabilization and then downward trend in the ratio of federal debt to GDP over the medium term, the rating will likely be affirmed and the outlook returned to stable, it said.
"If those negotiations fail to produce such policies, however, Moody's would expect to lower the rating, probably to double-A-1."
Moody's said it was unlikely it would keep the triple-A rating with a negative outlook into 2014.
"The only scenario that would likely lead to its temporary maintenance 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," it said.
The fiscal cliff – a mandated mixture of spending cuts and tax hikes – is set to occur at the beginning of 2013, unless bitterly divided lawmakers can find a way to avoid it.
Moody's said if the fiscal cliff happened, to would need evidence "that the economy could rebound from the shock before it would consider returning to a stable outlook."