Moody’s agency says AAA rating likely to be cut if Congress can’t agree on $1.2tn of spending cuts and tax rises

US politicians came under renewed pressure to resolve a dispute over $1.2tn worth of spending cuts and tax increases after the ratings agency Moody’s said it would probably cut its AAA rating if negotiations fail before a 1 January deadline.

As the German finance minister, Wolfgang Schäuble, warned that the global economy was burdened by the US’s huge debts, Moody’s ratcheted up the pressure on Congress to prevent the “fiscal cliff” from sending the economy into a nosedive next year.

A failure to strike a deal by the new year will allow time-limited tax breaks and spending commitments first implemented by former president George W Bush to lapse. Barack Obama has already extended the tax breaks but has refused to back them in the run-up to the presidential election.

Democrats argue that the package includes huge concessions to the wealthiest 1% and that they have widened the income and wealth gap during the recovery from the financial crisis. But Republicans have refused to make concessions that would maintain the tax breaks for middle-income families while excluding the richest groups.

John Boehner, the Republican speaker of the House of Representatives, said he was not confident Congress could reach a budget deal and avoid the downgrading. He said the Senate needed to act and President Obama needed to show “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 government borrowing limit almost triggered a 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 on Tuesday Moody’s noted that the government will probably reach the debt limit again by the end of the year, which means another round of negotiations in Congress on raising the limit if the government 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,” the 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 government has been able to continue borrowing at very low rates.

Investors see the US as a haven from economic turmoil in Europe and uncertainty in other parts of the world.