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Economy / ECONOMY

Moody’s Warns of Debt Downgrade

photo of Tim Fernholz
July 13, 2011

Moody’s, one of the world’s leading credit-rating agencies, warned U.S. policymakers once again that it would begin a review of U.S. obligations in mid-July thanks to fears that Congress will not raise the debt limit.

“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…. Moody's considers the probability of a default on interest payments to be low but no longer to be de minimis,” the agency said in a release. “As such, there is a small but rising risk of a short-lived default.”

If Treasury debt, long considered the benchmark for Aaa, good-as-cash financial instruments, is downgraded, the cost of federal deficit spending will increase substantially, putting more pressure on lawmakers to reduce deficits quickly.

 

While U.S. debt will only be downgraded in the event of a default, likely to the Aa range, the specific rating would depend on the government’s long-term budget plan and whether Congress decides to eliminate the debt ceiling entirely to avoid unforced defaults in the future.

Should Congress raise the debt ceiling and the Treasury continues to pay debt service, the U.S. rating will be unchanged.

The move, while not unexpected, emphasizes the increasing concern that financial and business interests are expressing over stalled debt talks. The Financial Services Roundtable, an influential banking lobby, sent a letter to lawmakers today urging them to lift the debt ceiling.

 

 

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