Moody’s puts U.S. bond rating under review
The U.S. could lose its Aaa bond rating if the Treasury’s debt ceiling isn’t raised soon, Moody’s Investors Service warned.
Moody’s formally put the U.S. rating under review for a possible downgrade, making good on a threat it issued June 2.
The firm cited “the rising possibility that the statutory debt limit will not be raised on a timely basis, leading to a default on U.S. Treasury debt obligations.”
A downgrade from the highest credit grade, even if symbolic, could be devastating for America’s image, particularly with its foreign creditors such as China.
Moody’s warning Wednesday followed the latest signs that talks between the White House and Republican leaders on the debt ceiling and spending cuts remain at an impasse. The Treasury has set Aug. 2 as the deadline for Congress to raise the $14.3-trillion debt ceiling or risk the government’s running out of money to pay some of its bills.
Asked Wednesday what would happen if the United States defaulted on its debt because of the impasse over the budget, House Speaker John A. Boehner (R-Ohio) called it “a crapshoot.”
The Treasury has many options for cutting spending before it would have to halt payments to bondholders. Moody’s acknowledged as much, saying it considered “the probability of a default on interest payments to be low but no longer to be de minimis.”
The firm said that “an actual default, regardless of duration, would fundamentally alter Moody’s assessment of the timeliness of future payments, and a Aaa rating would likely no longer be appropriate. However, because this type of default is expected to be short-lived, and the expected loss to holders of Treasury bonds would be minimal or nonexistent, the rating would most likely be downgraded to somewhere in the Aa range.”
President Obama has warned that Social Security payments could be halted if the debt ceiling wasn’t raised by the deadline.
Based on cash flow projections, the government would have enough to cover only slightly more than 55% of its bills in August without additional borrowing.
Moody’s announcement came after U.S. markets closed. The Treasury had no trouble earlier in the day selling $21 billion of new 10-year notes at an annualized yield of 2.92%.
Treasury bond rates have declined in recent days, showing no sign that investors are fearful that the government might default.
The U.S. holds the top debt rating from all three major ratings firms — Moody’s, Standard & Poor’s and Fitch Ratings. Other countries with the highest rating include Germany, France, Switzerland, Britain, Canada and Australia. The U.S. has had Moody’s top credit grade since 1917.
Moody’s recently has been the most aggressive of the three firms in downgrading debt of Europe’s fiscally struggling governments. The firm cut Ireland’s debt rating to “junk” status this week, meaning non-investment grade. Portugal was cut to junk last week.
