U.S. Faces Rating Cut Without Debt Accord, Moody’s Hess Says

The U.S. government’s Aaa credit rating may face a downgrade review if there’s no progress on increasing its statutory debt limit, said Steven Hess, senior credit officer at Moody’s Investors Service.

A bill to raise the debt limit by $2.4 trillion failed to win passage in the House of Representatives May 31 in a vote Democrats said was rigged to ensure its defeat. Republicans who control the House announced the vote last week as a way to demonstrate lawmakers don’t support extending the $14.3 trillion cap unless agreement is reached with President Barack Obama’s administration on significant spending cuts.

Hess spoke today in a telephone interview from New York.

On the debt-limit debate:

“If the negotiating stances of the two parties continue to be where they are now, in other words very far apart, and an agreement on the raising of the debt limit continues to look remote, probably by mid-July we would consider putting the rating on review for downgrade.”

“The negotiations now on deficit reduction over the medium term are a significant opportunity to actually do something on that front. Although fundamentally, the debt limit question is separate from long-term deficit reduction, they seem to be linked at this point in Washington.”

“The chances of them coming to an agreement, we think, are much reduced if this opportunity goes by and nothing happens.”

“Even though we would maintain the Aaa rating if there was no missed payment and the debt limit were raised, if the negotiations came to nothing or didn’t have a significant deficit reduction that was credible over the longer term, we would probably put a negative outlook on the rating.”

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