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Moody's Backs US's AAA Rating, S&P Cuts Fannie, Others

Even as Standard & Poor's began issuing a number of ratings downgrades Monday, as it explores the far-reaching effects of its downgrade of the U.S. credit ratingit issued last week, rival ratings agency Moody's reaffirmed the country's triple-A status.

In his first comments since S&P's decision, Moody's analyst Steven Hess sounded a note of caution about Moody's rating of the U.S., repeating that the Aug. 2 plan to cut deficits by $2.1 trillion was positive for America's credit standing, but not enough to keep its rating on a stable outlook.

Moody's had earlier put the U.S. on "review for downgrade" on July 13, before removing the ratings watch and affirming the triple-A rating on Aug. 2, after the U.S. Congress passed a measure cutting the fiscal deficit and raising the statutory borrowing limit.

"If the process for further deficit reduction that is included in the Budget Control Act produces results that are not really credible, that combined with the economic performance could potentially cause an early move on the rating," Hess told Reuters in an interview.

Even the $917 billion in savings that have already been agreed by Republicans and Democrats are not guaranteed in the long term, Hess said.

Those savings come mostly from slowing the growth of the discretionary programs that Congress approves annually, covering everything from the military to food inspection.

"One can have doubts about it," he said. "We certainly believe that it's credible in the near term, but we can have doubts about its enforceability over the long term because future Congress can always change that."

If the U.S. manages to keep its triple-A rating until the end of 2012, Moody's will likely take into account how the government will handle the expiration of Bush-era tax cuts to make a decision on the triple-A rating, currently under a negative outlook.

Plans from the next administration for additional deficit-reduction measures will also be taken into consideration, Hess said.

Moody's remarks help stocks move off their lows, but the Dow Jones Industrial Average remained down more than 200 points. In the wake of S&P's ratings actions and Treasurys rallied.

Further Downgrades from S&P

Meanwhile, S&P downgraded government-sponsored enterprises Fannie Mae and Freddie Mac to AA+ from triple-A, with S&P citing their reliance on U.S. government.

Ten of the country's 12 Federal Home Loan Banks were also cut to AA-plus. The banks of Chicago and Seattle had already been downgraded earlier to AA+.

Fannie and Freddie own or guarantee about half of all U.S. mortgages, or nearly 31 million home loans worth more than $5 trillion. As part of a nationalized system, they account for nearly all new mortgage loans. Their downgrade might force anyone looking to buy a home to pay higher mortgage rates.

S&P also cut ratings for several of the main arteries of the U.S. financial system—the Depository Trust Co.,National Securities Clearing Corp., Fixed Income Clearing Corp. and the Options Clearing Corp.—were cut one notch to AA-plus.

These institutions, previously rated triple-A by S&P, clear and process trades, and are crucial to the daily workings of the U.S. financial markets.

In issuing the downgrade, S&P explained it was not the result of any company-specific event.

"We have not changed our view of the fundamental soundness of their depository or clearing operations," S&P said.

S&P said its decisions were based on what it called shifts in the macroeconomic environment and the long-term stability of U.S. capital markets. S&P gave the four depository and clearing institutions negative outlooks.

Officials at S&P said they plan to indicate how local and state governments and insurers will be affected by the rating agency's downgrade of long-term U.S. debt .

The credit agency now rates 13 states at triple-A.

S&P is looking at the impact of the country's debt consolidation plan agreed on Aug. 2 on the budgets of states and municipalities, David Beers, the head of the agency's sovereign ratings group, said on Monday.

S&P also downgraded five insurers to double-A-plus from triple-A: Knights of Columbus, New York Life, Northwestern Mutual, TIAA and USAA.

Even Berkshire Hathaway Inc, the heavyweight insurer run by billionaire investor Warren Buffett was swept up in the wholesale credit revisions, with S&P affirming its AA-plus rating but cutting the company's outlook to negative.

Four of Berkshire's peers suffered the same fate: Assured Guaranty, Guardian, Massachusetts Mutual, and Western & Southern.

France, Britain Ratings Under Scrutiny

The S&P noted that some of the fiscal indicators in the U.K. are worse than in the U.S., especially in terms of its debt, but it also doesn't expect the U.S.'s debt burden to decline. For France, the S&P said it has addressed its long-term entitlement programs effectively and showed the political will to deal with issues.

The S&P expects the debt burden in Germany, the U.K. and France to peak in a few years and then decline.

It said the U.S.'s political environment was strong, but not as strong as most highly rated governments. It noted elected officials have been unable to put U.S. finances on sustained footing comparable to other triple-A-rated sovereigns.

For the S&P to downgrade the U.S. even further, it said it would need greater fiscal slippage than it anticipates. On the flipside, the possibility of upgrade depends on policymakers showing broader consensus on how to make fiscal policy choices.

The S&P earlier said that it thinks its sovereign ratings are robust and ahead of its rivals, and that it plans to continue that track record. It also noted that printing money doesn't deliver a triple-A rating.

-Reuters and AP contributed to this story.

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