Moody's puts U.S. ratings on review for downgrade

NEW YORK Wed Jul 13, 2011 6:39pm EDT

President Obama conducts a meeting with congressional leadership on deficit reduction in the Cabinet Room of the White House, July 13, 2011. Pictured with Obama are House Speaker John Boehner (L)(R-OH) and Senate Majority Leader Harry Reid (D-NV). REUTERS/Jason Reed

President Obama conducts a meeting with congressional leadership on deficit reduction in the Cabinet Room of the White House, July 13, 2011. Pictured with Obama are House Speaker John Boehner (L)(R-OH) and Senate Majority Leader Harry Reid (D-NV).

Credit: Reuters/Jason Reed

NEW YORK (Reuters) - The United States may lose its top-notch credit rating in the next few weeks if lawmakers fail to increase the country's legal borrowing limit and the government misses debt payments, Moody's Investors Service warned on Wednesday.

Moody's is the first of the big-three credit rating agencies to place the United States' Aaa rating on review for a possible downgrade, meaning the agency is close to cutting the country's rating.

Standard & Poor's placed the U.S. rating on negative outlook on April 18 which meant a downgrade is likely in 12-18 months.

"They are worried they are having these ideological arguments while Rome burns," said Carl Kaufman, portfolio manager at Oster weis Capital Management in San Francisco.

A lower credit rating would cause havoc in financial markets around the world and increase borrowing costs for the government and businesses, further harming public finances and weighing on the economic recovery.

In a statement, Moody's said it sees a "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."

Risks of a default on Treasuries, traditionally seen as the world's safest investment, have increased since the government reached its legal borrowing limit of $14.294 trillion on May 16.

Congress has refused to raise the statutory borrowing limit until agreement is reached on cutting the fiscal deficit which was $1.29 trillion in the last fiscal year.

The Treasury Department has said if the debt ceiling is not raised by August 2 it will have to start prioritizing payments.

DEFAULT RISK NO LONGER "DE MINIMIS"

Moody's said the probability there will be a default on interest payments is low, but it is "no longer to be de minimis."

"If the debt limit is raised again and a default avoided, the Aaa rating would likely be confirmed," Moody's said.

"However, the outlook assigned at that time to the government bond rating would very likely be changed to negative at the conclusion of the review unless substantial and credible agreement is achieved on a budget that includes long-term deficit reduction," the firm said.

There is precedent for Moody's decision. In 1996 the firm put some issues of U.S. Treasury debt on watch for a downgrade when the White House and Congress failed to extend the government's debt ceiling.

Moody's decision came after U.S. markets had closed on Wednesday but before Asian markets ramped up their activity. In the 24-hour currency markets the U.S. dollar index, which measures the greenback against a basket of trading partner currencies, had fallen earlier in the session and ended down 1.1 percent, marking the steepest one-day decline since early December.

"In the short-term, the dollar definitely has its problems. This ratings news sent the dollar tumbling. This is really not good," said Brian Dolan, chief strategist at Forex.com of Bedminster, New Jersey.

"Moody's might be doing this based on the politics as much as the threat of default, because the politics have become so problematic.... Between this and (Ben) Bernanke talking about QE3, the dollar could be entering a new downward phase," he said.

The U.S. dollar fell on Wednesday after Federal Reserve Chairman Ben Bernanke said the central bank could inject more monetary stimulus into the U.S. economy.

The currency fell to a record low against the Swiss franc. The greenback hit a trough of 0.8095 franc, on electronic trading platform EBS.

In after-hours trade, U.S. stock futures dropped 4.8 points to 1307.20 following Moody's decision.

COLLATERAL IMPACT

In addition, the credit ratings for institutions directly linked to the U.S. government were also put on review for a possible downgrade, including Fannie Mae, Freddie Mac, the Federal Home Loan banks and the Federal Farm Credit banks.

The ramifications of a U.S. downgrade could also be felt in places such as Israel and Egypt.

Moody's says the specific bonds issued by these two governments which carry a U.S. government guarantee "were also placed on review for possible downgrade." Israel and Egypt issue bonds without Washington's guarantee, and presumably they would not be subject to the current situation.

The Congress has routinely raised the nation's debt limit in the past. This time, however, negotiations seem to have stalled over the degree to which the fiscal deficit should be cut by raising taxes or cutting spending.

So far, Treasury Secretary Timothy Geithner has been able to resort to extraordinary measures to delay a debt default by at least August 2.

Unlike Fitch, which promised to cut the U.S. ratings to "restricted default" after a few missed debt payments, Moody's has said it would downgrade the United States to the "Aa" range, still considered investment grade.

(Reporting by Walter Brandimarte and Daniel Bases; Editing by Leslie Adler and Clive McKeef)

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Comments (10)
SanPa wrote:
This has been the GOP objective all along … drain the Treasury with tax cuts and spending, force the government into default, and then gut everything. Tax increases would be an antithesis to the GOP’s strategy.

On the issue of taxes … much money goes uncollected each year. IRS estimates at least a third of a trillion dollars go uncollected under current tax law; uncollected taxes on cash-paid services, uncollected taxes on tips, double deductions by small business owners. That alone would cover much of the $4 trillion over 10 yr. target, were the IRS equipped to make it collectable. Further, we have heard of the poster-child cases of GE and Forest Labs paying zero using legal shell-based loopholes. Yesterday, Reuters reported that Fox / News Corp. paid not just $0 taxes, but was actually recv’d over $4 billion in refunds. While we in the middle pay north of 40% per year in combined federal taxes, I am sure Mr. Rupert Murdoch pays 18% or less per year on his much more sizable income.

Cutting benefits for disabled vets and tossing grandmothers off Social Security is not an answer. Eliminating regulatory inspectors is not an answer; time and again, industry has put profit ahead of consumer safety e.g. Toyota, bankers. Enough is enough with revenue cutting … collect taxes fairly on those enjoying the benefits of a United States, as imperfect as we may be. It is high time that the GOP realize that this is not about a few me’s, but that this is about service the US’s.

Jul 13, 2011 5:39pm EDT  --  Report as abuse
neilm102 wrote:
How about we declare Moody’s as a terrorist organization and bomb them. Let us see how they downgrade us then.

Jul 13, 2011 5:57pm EDT  --  Report as abuse
chiefbuffalo wrote:
If Moody downgrades the Us credit rating, that will be the best news yet. That will finally force both the Democrats and Republicans to finally reach an agreement on spending and cost reduction.
It will not happen! Moodys is not about to downgrade the US rating for it would put the world markets in a tailspin and would truly create a world collapse.
That would mean Chinas’ investment in our debt would be worth less and after all the dollar is supporting the UN, and with our military bases, supporting, Korea, Germany. Our dollars are supporting the governments of the world and we are lending dollars to every crazy country around.
More scare tactics, more baloney.

Jul 13, 2011 6:10pm EDT  --  Report as abuse
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