U.S. Debit Limit Is Likely to Be Increased to Avoid Default, Moody's Says

Congress will likely raise the U.S. statutory debt limit or the government will resort to several options to avoid reaching the threshold to avoid missing interest payments, Moody’s Investors Service said.

Moody’s doesn’t anticipate placing the nation’s top Aaa credit rating on review for a downgrade even if action to raise the so-called debt ceiling is delayed because the risk of default will remain “extremely” low, the New York-based company said in a statement today. The U.S. has $8.96 trillion of marketable debt outstanding.

“We think it’s very unlikely, even up to the last minute, that they won’t do something,” said Steven Hess, senior credit officer in the sovereign risk group at Moody’s in a telephone interview today.

The U.S. debt is projected by the Treasury Department to reach its authorized ceiling of $14.3 trillion within a few months, setting the stage for a congressional showdown over lifting the borrowing limit. Also, current government funding runs out March 4 as lawmakers battle over the budget for the rest of the fiscal year that ends Sept. 30.

If debt service is interrupted the credit-rating company would consider a downgrade, though a brief lapse in interest payments “would not automatically lead to a ‘penalty downgrade,” Moody’s said.

Cash Balances

U.S. debt has more than doubled from about $4.34 trillion in mid-2007 as the government increased spending to bail out the financial system and bring the economy out of recession. The budget deficit has increased to 8.8 percent of the economy from 1 percent in 2007.

The U.S. has cash balances and deposits at the Federal Reserve it can tap if Congress doesn’t raise the limit by the deadline, Moody’s said. It can also end contributions to government trust funds and cut spending to help preserve cash on hand, which may extend the government’s ability to operate without a higher debt limit “for a couple of months beyond the time borrowing authority ceases,” the report said.

A budget deficit of more than $1 trillion and projected- future record shortfalls give the Treasury less latitude to maneuver as the limit approaches compared with other times when borrowing restrictions have been a point of contention, such as 1996, because the U.S. is spending at a faster pace, Hess said.

‘More Limited’

“The time frame is more limited at this point in terms of the actual financial resources they have at their disposal at this point without cutting expenditures,” Hess said. “The reason for that is the deficit is much larger. The time frame is shorter than in 1996, we believe.”

President Barack Obama’s $3.7 trillion budget proposal for fiscal 2012 would cut the budget deficit to $1.1 trillion and to $607 billion by 2015, with two thirds of the reduction coming from spending cuts in areas ranging from heating subsidies for the poor to grants for airports and water-treatment plants. The rest is from revenue increases, including letting taxes rise for married couples with more than $250,000 in annual income, according to the documents.

The budget falls short of the deficit reduction that Obama’s fiscal commission proposed in December and would have only a modest impact on the $12 trillion in total deficits the Congressional Budget Office projects the government will run up over the next 10 years. That’s primarily because Obama isn’t proposing changes for Medicare, Medicaid or Social Security, the entitlement programs that represent about 40 percent of the budget and are primary drivers of long-term deficits.

Accelerated Timetable

Moody’s said in December that the agreement between Obama and Republicans in Congress to extend the Bush-era tax cuts would accelerate the timeline under which the U.S. credit rating may be given a negative outlook.

“If this budget proposal by Obama were adopted, that would be a marginal positive, but it still doesn’t attack the big part of the budget that needs to be addressed in order to fundamentally improve the government’s creditworthiness,” Hess said. “Expenditure cuts are good from the point of view of deficit reduction, but that’s really only a short-term positive and not something that alters the long-term trajectory.”

The U.S. first adopted a debt limit in 1917 as a way to help fund participation in World War I, as Congress loosened borrowing restrictions that had required the legislature to approve each sale of Treasuries on a separate and individual basis, according to Moody’s.

To contact the reporter on this story: Daniel Kruger in New York at dkruger1@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net

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