The American Debt: Moody’s Cite U.S. Debt Limit as a Credit Risk

By Eliza

Jul 18, 2011 1:40pm

ap moodys corp jp 110713 wb The American Debt: Moodys Cite U.S. Debt Limit as a Credit Risk

ABC News' Daniel Arnall (@abcmoneyguy) reports:

Moody’s, in its weekly publication on credit and ratings, published a piece today suggesting that the statue creating a U.S. debt limit is actually a negative for the nation’s credit rating.

“We think that the way the US government handles the limit, particularly in times of divided government, is credit negative for the US,” writes Steven Hess, the VP in charge of U.S. sovereign credit ratings.

“The US statutory debt limit is an uncommon attribute not shared by most sovereign debt issuers in that it is not tied to the budgetary process. As a result, when the government adopts a budget, the financing of the expenditures authorized is not automatically assured.”

Hess points out that Congress has already approved the spending when they voted on continuing resolutions in April – and knew at the time that 40% of the spending would have to be financed through borrowing.

Why do they need to vote on it again? They’ve already said they approve of the spending.

“In the US, the debt limit has not effectively constrained the rise in government debt because Congress regularly raises the debt limit and because the debt limit is not related to the level of expenditures approved by Congress,” writes Hess in the Moody’s note. “However, the legislative process of raising the debt limit creates periodic uncertainty over the government’s ability to meet its obligations. We would reduce our assessment of event risk if the government changed its framework for managing government debt to lessen or eliminate this uncertainty.”

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