Moody’s Will Review U.S. Credit Rating if No Debt Limit Progress in the Coming Weeks

Jun 2, 2011 2:08pm

ABC News' Dan Arnall (@abcmoneyguy) reports:  In a release this afternoon, the Moody’s ratings agency said it would put the U.S. credit rating under review if Congress and the Obama administration don’t make progress on increasing the debt limit. Treasury is currently posting a U.S. total debt at $14,344,668,281,211.01 – well above the $14.294 trillion limit thanks to some borrow Peter/pay Paul moves with Federal employee retirement accounts.

“If the debt limit is raised and default avoided, the Aaa rating will be maintained,” says the press release. “However, the rating outlook will depend on the outcome of negotiations on deficit reduction. A credible agreement on substantial deficit reduction would support a continued stable outlook; lack of such an agreement could prompt Moody's to change its outlook to negative on the Aaa rating.”

Moody’s says the increased political “polarization” over increasing the government’s statutory debt limit has increased the chances that Uncle Sam will miss some interest payments – a default in the parlance of Wall Street. 

They put out three scenarios which might play out [emphasis mine]:

1. “The likelihood that Moody's will place the US government's rating on review for downgrade due to the risk of a short-lived default has increased. Since the risk of continuing stalemate has grown, if progress in negotiations is not evident by the middle of July, such a rating action is likely. The Secretary of the Treasury has indicated that the government will have to drastically reduce expenditure sometime around August 2 if the debt limit is not raised; the initiation of a rating review would precede this date.

2. If a debt-ceiling-related default were to occur, Moody's would likely downgrade the rating shortly thereafter. The extent of and length of time before a downgrade would depend on how factors surrounding the default affect the government's fundamental creditworthiness, including (a) the speed at which the default were cured, (b) an assessment of the effect of the default on long-term Treasury borrowing costs, and (c) measures put in place to prevent a recurrence. However, a rating in the Aa range would be the most likely outcome. Any loss to bondholders would likely be minimal or non-existent, as Moody's anticipates that a default would be cured quickly.

3. If default is avoided, the AAA rating would likely be affirmed after any review. Whether the outlook on the rating would be stable or negative would depend upon whether the outcome of the negotiations included meaningful progress toward substantial and credible long-term deficit reduction. Such reduction would imply stabilization within a few years and ultimately a decline in the government's debt ratios, including the ratio of debt to GDP.”


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