NEW YORK Moody's Investors Service said it may cut the United States' triple-A rating due to the rising chance its debt ceiling is not raised.
KEY POINTS: * Moody's was the first among the big-three rating agencies to place the United States' Aaa rating on review for a possible downgrade, which means a negative rating action is impending.
TROY BUCKNER, MANAGING PRINCIPAL, NUWAVE INVESTMENT MANAGEMENT, PARSIPPANY, NEW JERSEY:
"I believe that market participants have considered the discussion of a new, higher debt ceiling to be largely ceremonial even if the negotiations surrounding the budget are not. As such, I think most have considered that there would be some kind of agreement to avoid a short-term stalemate.
"What most have not considered, in my opinion, is the possibility of a U.S. government debt downgrade in the short run. This would likely be a game-changer over the very short run, and could cause large market dislocations very quickly. Equities would likely drop quickly. Bonds might drop initially, exacerbating an equity market sell-off, but could then recover if the stock markets sell off dramatically.
JEFFREY CLEVELAND, CHIEF ECONOMIST AT PAYDEN & RYGEL, LOS ANGELES, CALIFORNIA:
"Will the market react overnight and tomorrow? I don't think so because I don't know if this is new information. We've known for a while that Moody's was looking for a rise in the debt ceiling. Does this push Congress toward taking action sooner rather than later? That's the big question here. There was some immediate market reaction but that has receded a bit here."
CARL KAUFMAN, PORTFOLIO MANAGER, OSTERWEIS CAPITAL MANAGEMENT, SAN FRANCISCO:
"They are worried they are having these ideological arguments while Rome burns. They want to say this is serious. How can you continue to run a $1 trillion deficit? Only the government can run a deficit and only it can fix it.
"Are we going to default on our debt? I don't think so. But this is drama. If we come up with a credible budget like a $2 trillion cut without smoke and mirrors, I think Moody's will go away.
"Markets are the zephyr in a whirlwind of headlines. All financial markets are at the total mercy of headlines. They have no convictions right now."
BRAD BECHTEL, MANAGING DIRECTOR, FAROS TRADING, STAMFORD, CONNECTICUT:
"This is not good for the dollar. Moody's told us in June they would consider doing this. What is new, though, is their saying they'll likely assign a negative outlook even if the debt ceiling is raised but no substantial agreement toward long-term deficit reduction is achieved. That's a real negative for markets. I think people have been so focused on the euro zone issues that they've not focused as much as they otherwise would have on the debt ceiling issue. That may change now. If there's a downgrade, the market reaction would be negative as there would be a lot of forced selling that would have to occur."
CLIFF DRAUGHN, PRESIDENT & CHIEF INVESTMENT OFFICER AT EXCELSIA INVESTMENT ADVISORS, SAVANNAH, GEORGIA:
"They've been threatening to do it for the last 60 days. What has been beginning to spook Moody's and some other people is that Congress may be dumb enough to actually default on the debt. When you've got Eric Cantor screaming no new taxes - you are not going to increase any revenue. You've got Nancy Pelosi on the other side of the aisle saying we will absolutely not cut any benefit of entitlement - Medicare, Social Security, etc. Then you've got (President Barack) Obama on the top saying everything is on the table. How do you rationally approach that type of situation?"
"It's crazy for the Republicans to think that there shouldn't be a tax increase. And the Democrats are just as foolhardily stating that we can balance this deficit by growing us out of this position over a period of time and taking care of Social Security and Medicare liabilities. It's a proven fact the numbers won't support it. Both sides are trading politics for policy. What should be, in my opinion, responsible government is simply become a matter of who wants to get elected."
"I'm not surprised by what Moody's has done, it's the smart thing to do. They should have done it 2 or 3 months ago. What effect is that going to have on the market? Well clearly any instability of a large nation with the world's reserve currency
defaulting on its debt -- it's never happened before. So just the simple fear of the unknown. The fact we are going to discuss defaulting while at the same time discuss paying zero percent on fed funds and/or creating more money in the form of QE3 or whatever form you want to make it in creates in the investment world a huge level of uncertainty."
ALBERTO BERNAL, HEAD OF EMERGING MARKETS FIXED INCOME RESEARCH, BULLTICK CAPITAL MARKETS, FLORIDA:
"As the Chinese say 'may we live in interesting times.'
"The news is not positive. The effects of the U.S. seeing a rating downgrade is significant on whatever administration is in power. This doesn't help the Republicans or the Democrats, this doesn't help anyone. So if I were to make a bet, this warning increasing the possibility of the U.S. reaching an agreement on August 2nd because it will place more pressure on politicians to get together and do something to make sure that the U.S. doesn't go into technical default.
"This doesn't take away the main issue that the U.S. needs to fix its fiscal accounts on a structural basis. The U.S. needs to follow a structural tax reform, it needs to increase the retirement age, it needs to change the rules of the game of entitlement, it needs to do very difficult things.
"But from the standpoint of the warning, it increases the possibility of a deal being reached.
"Because the headline is going to be very bad. Every single newspaper tomorrow will have on the front page the possibility of the U.S. losing its triple A rating."
JAY MUELLER, ECONOMIST & PORTFOLIO MANAGER, STRONG CAPITALMANAGEMENT INC, MENOMONEE FALLS, WIS.
"I'm a little bit surprised at the timing. I thought they would've waited a bit longer. They certainly gave everyone a heads up with their negative outlook a little while ago.
"They've made little to no progress on resolving the issues. In a sense this is not new news. It's a recognition of an existing reality. This is a very long and slow moving train wreck that's been going on for many years, if not decades.
"The rating agency is stating a reality. It's not a surprise to anyone who looked at the numbers."
DAVID SEMMENS, U.S. ECONOMIST, STANDARD CHARTERED, NEW YORK:
"Moody's still sees a very low chance of default, but now sees this as no longer minimal. The rising possibility that the debt limit is not lifted is driving this concern. This will continue to place pressure on the negotiations going on in Washington daily. There is still no clear consensus. Furthermore, we would look for a convincing rather than a piecemeal solution, otherwise this will be a very temporary solution and we will be reliving this discussion sooner rather than later."
PAUL SCHATZ, PRESIDENT AND CHIEF INVESTMENT OFFICER, HERITAGE CAPITAL, WOODBRIDGE, CONNECTICUT:
"The rating agencies were so slow to respond to anything in 2007 and 2008 that now they're overly quick to respond. I don't think this is a big deal and I don't think it will move the needle for long. This will be a short-term issue, no more than half a day. The way people are reacting to the debt ceiling issue you'd think we were in the middle of a tailspin. But the market is very resilient now, and it's taking all this in stride. There's no chance of a default. This is just a tiny hiccup."
BRIAN DOLAN, CHIEF STRATEGIST, FOREX.COM, BEDMINSTER, NEW JERSEY:
"In the short-term, the dollar definitely has its problems. This ratings news sent the dollar tumbling. This is really not good. Moody's might be doing this based on the politics as much as the threat of default, because the politics have become so problematic. This game of chicken the two sides are playing goes on, the cars get closer together but nobody seems willing to swerve. Between this and (Ben) Bernanke talking about QE3, the dollar could be entering a new downward phase."
WARD MCCARTHY, CHIEF FINANCIAL ECONOMIST, JEFFERIES & CO., NEW YORK:
"They've been threatening this for a while and they're just increasing the drumbeat. It's time for our elected officials to do what they were elected to do. This was a warning shot across the bow.
"It means 'deer in the headlights' for the Treasury market. People don't know what to do, especially in this market, where safety is a top concern. If you can't hide in Treasuries, you don't know where to hide. It's just adding to uncertainty."
MARKET REACTION: STOCKS: U.S. stock index futures fell BONDS: U.S. bond prices fell and yields rose FOREX: The dollar fell against the euro and yen