Moody's sounds alarm over US debt limit, deficits

NEW YORK/WASHINGTON Thu Jun 2, 2011 7:40pm EDT

1 of 6. U.S. Treasury Secretary Timothy Geithner sits onstage for an interview with Politico's Mike Allen at the Newseum in Washington May 25, 2011.

Credit: Reuters/Jonathan Ernst

NEW YORK/WASHINGTON (Reuters) - Ratings agency Moody's warned on Thursday it would consider cutting the United States' coveted top-notch credit rating if the White House and Congress do not make progress by mid-July in talks to raise the debt limit.

Treasury Secretary Timothy Geithner, seeking to convince Congress to increase his borrowing authority and prevent a government default, went to Capitol Hill to press his case in a 45-minute meeting with first-term lawmakers.

"I am confident that two things are going to happen this summer," Geithner told reporters after the meeting. "One is that we are going to avoid a default crisis and we are going to reach agreement on a long-term fiscal plan."

The meeting occurred just hours after Moody's Investors warned that slow-moving deficit talks led by Vice President Joe Biden, hindered by entrenched positions on both sides, had increased the odds of a short-lived default by Washington.

Moody's warning increases pressure on President Barack Obama and House of Representatives Speaker John Boehner, the top Republican in the U.S. Congress, to strike a deal soon or risk upsetting global financial markets.

Geithner has predicted a financial catastrophe if Congress fails to increase the current $14.3 trillion borrowing cap by August 2, when his department will exhaust the extraordinary cash management measures it has been using since reaching the debt limit on May 16.

Geithner said he had a "good meeting" with the first-term lawmakers, but some of the skeptical Republicans, who oppose increasing the debt limit without implementing deep spending cuts, were less pleased.

"It is frustrating when the secretary talks in circles and that is very unfortunate," said Representative Stephen Lee Fincher. "We are all big boys and girls. We need a framework put forward and we are not seeing that out of this administration, only seeing talk, talk and talk."

Representative Kristi Noem, a favorite of the fiscally conservative Tea Party movement, said the freshmen Republicans made it clear to Geithner that they would not "give this administration a blank check to spend even more."

"Secretary Geithner doesn't get it," said Noem, one of the "mama grizzlies" touted by ex-Alaska Governor Sarah Palin.

But a Treasury official characterized the talks with lawmakers as friendly and constructive.

POLITICAL GRANDSTANDING

Saying the risk of "continuing stalemate" between the two sides had grown, Moody's urged progress on deficit reduction soon before politics takes over in the run-up to the November 2012 presidential election.

"We think this is an opportunity," Steven Hess, sovereign credit analyst for Moody's, told Reuters. "If this opportunity goes by without them realizing a serious long-term debt/deficit reduction program, then we think that until the presidential election, the chances of such an agreement are really much reduced."

Mary Miller, a top Treasury official, said the Moody's statement underscored the need for Congress to move quickly to make sure the United States could meet all its debt obligations while working to reach a long-term fiscal deal.

A U.S. default would roil global financial markets, but few investors are rattled just yet. Wall Street, in large part, expects the debt and deficit negotiations to go down to the wire, as did talks over tax cuts and the 2011 budget.

"We've been through this political grandstanding before," said Jim Kochan, chief fixed-income strategist at Wells Fargo Advantage Funds.

"We always go right down to the day on debt ceiling targets being raised. No congressman and no president wants to be responsible for Social Security payments not going out. This is a minimal risk. We've seen this so many times."

Obama has tasked Biden to lead negotiations with Republican and Democratic lawmakers to find a deficit-reduction deal that would be palatable to Congress and pave the way for the debt limit to be raised. Their talks are due to resume on June 9.

But Republicans refuse to consider tax increases as part of a deal, while Democrats are opposed to Republican proposals to scale back the popular government-run Medicare healthcare program for future retirees.

Republicans seized on the announcement by Moody's, which comes two months after Standard & Poor's revised down its credit outlook on the U.S. rating, as proof of the need to make some sharp spending cuts.

"This report makes clear that if we let this opportunity pass without real deficit reduction, America's financial standing will be at risk," said Boehner. "A credible agreement means the spending cuts must exceed the debt limit increase.

Senator Charles Schumer, a top Democrat, said a compromise that prevents a "catastrophic default on our obligations and significantly reduces the debt is within reach."

(Additional reporting by Rachelle Younglai, Alister Bull and Thomas Ferraro; Writing by Deborah Charles; Editing by Ross Colvin, David Lawder and Eric Walsh)

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/
Comments (30)
actnow wrote:
There will be dire consequences if this debt and deficit are not brought under control immediately. Our future hangs by a thread and all this president can do is increase spending and devalue the dollar. If the Republicans give in on this, the Democrats will refuse to balance the budget and destroy all of our futures.

Jun 01, 2011 10:05pm EDT  --  Report as abuse
txgadfly wrote:
The best thing that could happen would be a forced Federal default. The only way to stop the absolutely reckless, irresponsible spending by the Federal Government (most of it overseas) is to cut up the national credit card.

Since our election system has failed, the markets will finally stop these wars. There is a real danger that money will not be repaid unless these wars stop.

Jun 01, 2011 10:45pm EDT  --  Report as abuse
seattlesh wrote:
Txgadfly, what you suggest is highly unlikely and very irresponsible. The US is and remains on center stage along with the other major world players and as such a position as you advocate “to default”may have some populist appeal at a certain level it is not what the grown ups in the room will do. As screwed up as Congress is at the moment, clearer heads will prevail.

Jun 01, 2011 11:04pm EDT  --  Report as abuse
This discussion is now closed. We welcome comments on our articles for a limited period after their publication.