Moody’s Says U.S. May Be Cut If No Progress on Debt Limit

U.S. Treasury Secretary Timothy F. Geithner
Timothy F. Geithner, U.S. treasury secretary, has warned that a failure to raise the debt ceiling by Aug. 2, the date he now projects borrowing authority would be exhausted, may have catastrophic effects on the U.S. economy by sharply raising borrowing costs. Photographer: Andrew Harrer/Bloomberg

Moody’s Investors Service said it will put the U.S. government’s Aaa credit rating under review for a downgrade unless there’s progress on increasing the debt limit by mid-July.

“The heightened polarization over the debt limit has increased the odds of a short-lived default,” New York-based Moody’s said in a statement today. “If this situation remains unchanged in coming weeks, Moody’s will place the rating under review.”

Treasury Secretary Timothy F. Geithner has warned that a failure to raise the debt ceiling by Aug. 2, the date he now projects borrowing authority would be exhausted, may have catastrophic effects on the U.S. economy by sharply raising borrowing costs. Republicans are using the debt-ceiling talks to press for cuts in government spending.

Geithner today predicted that agreements would be reached on both issues.

“I’m confident two things are going to happen this summer,” he told reporters after meeting with freshman House members at the Capitol. “One is we’re going to avoid a default crisis, and we’re going to reach agreement on a long-term fiscal plan.”

House Speaker John Boehner, Republican of Ohio, used the Moody’s statement to underscore his party’s position that any deal on raising the $14.3 trillion debt ceiling must be accompanied by a plan to reduce budget deficits.

‘Credible Agreement’

“An increase in the debt limit without major spending cuts will hurt our economy and destroy jobs,” Boehner said in a statement. “A credible agreement means the spending cuts must exceed the debt-limit increase.”

In April, Standard & Poor’s put the U.S. government on notice that it risks losing its top AAA credit rating unless policy makers agree on a plan by 2013 to reduce budget deficits and the national debt.

The announcement by S&P marked the first time the U.S. credit outlook was questioned since 1995 and 1996, when a dispute between then-President Bill Clinton and House Speaker Newt Gingrich led to government shutdowns. Fitch Ratings put U.S. debt on a “negative ratings watch” in November 1995 until spring 1996, and Moody’s put some U.S. government bonds on review for a possible downgrade in January 1996.

“Obviously the debt limit has to be raised or it’s going to bring a severe blow to the U.S. economy,” said Jason Rogan, director of U.S. government trading at Guggenheim Partners LLC, a New York-based brokerage for institutional investors. Moody’s is “pretty much restating what everyone on Wall Street is well aware of.”

Treasuries, Stocks

Yields on 10-year Treasuries climbed to 3.03 percent at 5 p.m. in New York, from 3.01 percent before the Moody’s announcement and a six-month low of 2.94 percent yesterday. The euro climbed as much as 1.3 percent to $1.4514, the strongest level since May 6. The Standard & Poor’s 500 Index, which tumbled 2.3 percent yesterday amid concern the economic recovery is faltering, fell 0.1 percent to 1,312.94 after opening the session at its cheapest valuation since March.

Representative Steny Hoyer of Maryland, the second-ranking Democrat in the House, said the warning by Moody’s makes clear that both parties must act on raising the debt ceiling.

“The markets ought to know we’re going to get this done,” Hoyer said after a White House meeting with President Barack Obama. A default “would have catastrophic consequences.”

A Treasury official said the department did not have any conversations with Moody’s in advance of the announcement and found out about it shortly before it was released.

Spending Cuts

A bill that would raise the limit by $2.4 trillion failed to win House passage May 31 in a vote Democrats said was rigged to ensure its defeat. Republicans who control the House of Representatives announced the vote last week as a way to demonstrate that lawmakers don’t support extending the limit unless agreement is reached with the Obama administration on significant spending cuts.

“The negotiations now on deficit reduction over the medium term are a significant opportunity to actually do something on that front,” said Steven Hess, senior credit officer at Moody’s in New York. “Although fundamentally, the debt limit question is separate from long-term deficit reduction, they seem to be linked at this point in Washington.”

Boehner yesterday said “it’s time” he and Obama get personally involved in talks on a debt-reduction package. Boehner was voicing concerns that bipartisan negotiations led by Vice President Joe Biden are proceeding too slowly.

Boehner said the White House and Congress should strike a deal within a month to avoid a continuing impasse over raising the debt ceiling.


His comments raised the possibility that the stalemate could culminate in the coming weeks in the year’s second high-level negotiation between Obama and Republican leaders on spending cuts. Obama and Boehner hashed out the final details of an agreement on the 2011 federal budget face-to-face at the White House in April, agreeing to about $38.5 billion in reductions with just hours to spare before a government shutdown.

Biden is directing negotiations among a bipartisan group of six House and Senate lawmakers, with a goal of a $1 trillion debt-reduction package.

Democrats and Republicans have found common ground on an estimated $200 billion in cuts to programs outside of Medicare, Social Security and Medicaid, according to congressional aides. Still, the two sides have yet to address many of the most difficult issues in the budget, according to Maryland Representative Chris Van Hollen, a Democratic member of the panel.

Cuts to Medicare

Democratic members, like South Carolina Representative Jim Clyburn, are opposed to cutting Medicare, while Republicans like House Majority Leader Eric Cantor insist they will not allow tax increases as part of a budget plan. The Biden group is scheduled to meet next on June 9.

A separate budget-cutting effort led by Senators Mark Warner of Virginia, a Democrat, and Saxby Chambliss of Georgia, a Republican, has stalled after losing one of its three Republican members, Senator Tom Coburn of Oklahoma.

For all the debate over the debt limit, bond yields in the U.S. are lower now than when the government was running a budget surplus a decade ago.

Credit-default swaps that protect against default on U.S. debt for one year have risen to 46.5 basis points from 24 basis points on May 16, when the U.S. reached the borrowing limit, according to data provided by CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market. The contracts pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt.

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