MOODY´S WARNS OF U.S. DEFAULT RISK / THE FINANCIAL TIMES ( RECOMMENDED READING )

Moody’s warns of US default risk

By James Politi in Washington


Published: June 2 2011 20:18

Moody’s Investors Service, the credit rating agency, warned of a “very small but rising risk” that the US could default on its debt, adding pressure on Congress and the Obama administration to overcome severe political divisions and strike a deal on fiscal policy.


The report from Moody’s follows a move in April by Standard & Poor’s to change the outlook on America’s vaunted triple-A credit score from “stable” to “negative” because of the lack of a political consensus on deficit reduction.

The starkest message from Moody’s was that if politicians in Washington did not make progress on raising America’s $14,300bn borrowing limit in the next few weeks, it could put the US rating on review for a possible downgrade. The Treasury department has warned that if the country’s debt ceiling is not raised by August 2, the US will exhaust its capacity to pay its bills.


But Republicans are demanding deep spending cuts and budget reforms in exchange for greater borrowing authority, and negotiations to reach an agreement between the feuding sides are only advancing slowly.


“Although Moody’s fully expected political wrangling prior to an increase in the statutory debt limit, the degree of entrenchment into conflicting positions has exceeded expectations,” the report, whose lead author is analyst Steven Hess, said. “The heightened polarisation over the debt limit has increased the odds of a short-lived default,” it said.


Moody’s said that if the debt ceiling was increased, America’s triple A rating would be maintained. But ultimately the fate of the US credit outlook will be linked to what kind of substantive deal on long-term fiscal reform Republicans and Democrats are able to reach.

“The debt limit negotiations represent a real near term opportunity for agreement on a plan for fiscal consolidation. If this opportunity passes, Moody’s believes the likelihood of anything significant being accomplished before the next presidential election is reduced,” it said.


On Thursday, Tim Geithner, US Treasury secretary, was set to meet freshmen lawmakers in the House of Representatives – mostly Republicans – in the latest attempt to break the political logjam on the debt limit.


After the Moody’s report was published, Mary Miller, assistant treasury secretary for financial markets, said it “simply underscores the need for Congress to move quickly to ensure that the US can meet all of its obligations, while continuing to work on a consensus approach towards long term fiscal balance.”


This week, John Boehner, House speaker, said he hoped a deal could be reached within a month. With the stakes rising, the formal negotiations are set to resume next week under the leadership of Joe Biden, vice-president.


Although the pressure from rating agencies is increasing, bond investors have shown little concern about the chance of a US default. Amid a weaker economic recovery, Treasuries have rallied, with the 10-year bond yield – which has an inverse relationship to prices – falling below 3 per cent for the first time since December this week. On Thursday, it rose slightly, back up to 3.02 per cent in afternoon trading.


Copyright The Financial Times Limited 2011.