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HONG KONG, Oct 22 (Reuters) - The United States, which posted a record deficit in the last fiscal year, may lose its Aaa rating if it does not reduce the gap to manageable levels in the next three to four years, Moody's Investors Service said on Thursday.
The U.S. government posted a deficit of $1.417 trillion in the year ended Sept. 30 as the deep recession and a series of bank rescues cut a gaping hole in its public finances. The White House has forecast deficits of more than $1 trillion through fiscal 2011.
"The Aaa rating of the U.S. is not guaranteed," said Steven Hess, Moody's lead analyst for the United States, said in an interview with Reuters Television.
"So if they don't get the deficit down in the next three to four years to a sustainable level, then the rating will be in jeopardy," he said.
Moody's has a stable outlook on the U.S. rating, which indicates a change is not expected over the next 18 months.
Earlier this year, financial markets were spooked by concerns about the risk of the United States losing its top rating after Standard & Poor's revised its outlook on Britain to negative from stable, indicating the risk of a downgrade.
Ireland was stripped of its AAA rating earlier this year by Moody's, Standard & Poor's and Fitch.
NEXT BUDGET IS KEY
Hess said Moody's is in a "wait-and-see mode" on whether the U.S. government will present credible measures to trim the deficit "and the next budget is going to be very important."
Right now, the government's debt is affordable because U.S. Treasuries' status as a global benchmark keeps interest rates low, Hess said. If the dollar loses its role as the world's major reserve currency, interest rates would rise and the rating could be threatened, though that is not an immediate threat, Hess said.
The possibility of protracted budget deficits has already helped drive the U.S. dollar to 14-month lows against a basket of major currencies.
Budget gaps of the United States and other governments have ballooned amid massive spending to prop up financial markets and stimulate economies hit by a global credit crisis.
Standard & Poor's and Fitch said they are keeping a stable outlook on the U.S. rating, meaning a downgrade is not expected for up to two years.
The deficits have to be reduced, however, said Fitch analyst Brian Coulton.
"We think it's inevitable that there's going to have to be tax increases in the U.S. to stabilize the debt ratios," he said. One concern is that the government is assuming that a return to rapid growth of 4 percent from 2011 will help improve revenues and reduce the deficit, "and we think that's a little optimistic," he said.
BILL GROSS EXPECTS DOWNGRADE
U.S. Treasury Secretary Timothy Geithner said on Tuesday that the overwhelming imperative now is to reinforce the nascent economic recovery. The administration will lay out plans to trim the deficit in its proposed budget in February, Geithner said in an interview.
"For there to be a recovery that's self-sustaining over time ... people have to be confident that we'll bring those deficits down over time and that's a difficult balance," he said.
Hess's view echoed warnings earlier this year from Bill Gross, co-chief investment officer of Pacific Investment Management Co and manager of the world's biggest bond fund. Gross said in May that the United States will face a downgrade in "at least three to four years, if that."
If the United States were to lose its AAA rating, there would likely be a knee-jerk response toward higher rates, but the impact would be muted by the size and importance of the U.S. Treasury market, said Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott in Philadelphia.
Treasuries are extremely liquid, "and there's no other market that could realistically replace that liquidity," he said.
Hess said that reducing the U.S. budget deficit would be a challenge.
"Raising taxes is never popular and difficult politically so we have to see if the government can do that or cut expenditure," he said while adding it would be tough to reduce expenditures.
At $1.4 trillion, the U.S. budget shortfall is 10 percent of U.S. GDP, the most since World War Two. (Reporting by Umesh Desai and Rafael Nam; Additional reporting by Dena Aubin in New York; Editing by Kazunori Takada and Kenneth Barry)