By Peter Schroeder - 07/13/11 09:15 PM EDT
The “rising possibility” that the debt limit will not be raised by Aug. 2 has driven Moody’s Investors Service to put the nation’s triple-A credit rating on review for a downgrade.
In a statement, the credit-rating agency warned that the risk of a default on U.S. obligations, while low, had risen. A default would “fundamentally alter Moody’s assessment of the timeliness of future payments, and a AAA rating would likely no longer be appropriate,” Moody’s stated shortly after markets closed Wednesday.
The agency also warned that even if the debt limit was raised in time, the nation’s credit rating would retain a negative outlook if no “substantial and credible agreement” also was struck to reduce the deficit “beginning within the next few years.”
The administration used Moody’s move to prod Congress to get a deal done.
“Moody’s assessment is a timely reminder of the need for Congress to move quickly to avoid defaulting on the country’s obligations and agree upon a substantial deficit-reduction package,” said Jeffrey Goldstein, the Treasury Department’s undersecretary for domestic finance.
The credit-rating agency had warned in June that the nation’s ratings would be put on downgrade watch if “meaningful progress” had not been made on a deal to raise the debt ceiling. Tuesday’s action made clear that lawmakers had not done enough to convince Moody’s that a deal could be struck.
“The review of the U.S. government’s bond rating is prompted by the possibility that the debt limit will not be raised in time to prevent a missed payment of interest or principal on outstanding bonds and notes,” the agency stated. “As such, there is a small but rising risk of a short-lived default.”
If the government does default, its new rating following the default would depend on how quickly the default was rectified, the likely effect on future borrowing costs and whether there was a change in process for raising the debt limit to reduce the chance of another default in the future.
Moody’s made it clear, however, that a return to triple-A “would be unlikely in the near term, particularly if there were no progress on the third consideration.”
In addition, the credit-rating agency is reviewing for downgrade the triple-A ratings of financial institutions directly tied to the federal government, such as Fannie Mae and Freddie Mac. Bonds issued by Israel and Egypt, but guaranteed by the U.S. government, also could be downgraded, as could certain housing and municipal bonds.
In April, Standard & Poor’s lowered its outlook on U.S. debt from “stable” to “negative,” citing growing pessimism about lawmakers’ abilities to strike a deal. And Fitch Ratings warned in June that the nation’s triple-A credit rating would be endangered even with a short-term “technical” default.