S&P Would Cut U.S. to D on Default, Moody’s May Lower to Aa

S&P Would Cut U.S. to D Rating on Default
President Barack Obama, a Democrat, is trying to reach a compromise with Republican lawmakers who are seeking spending cuts before they agree to raise the nations borrowing limit, currently capped at $14.3 trillion. Photographer: Brendan Smialowski/Bloomberg

Standard & Poor’s would cut the U.S. credit rating to its lowest level and Moody’s Investors Service said it will probably reduce its ranking if the government fails to increase the debt limit, leading to a default.

S&P would lower its sovereign top-level AAA ranking to D, the last rung on its scale if the U.S. can’t pay its debt, John Chambers, chairman of the company’s sovereign rating committee, said today. Moody’s said it would probably assign a position in the Aa range, or within three steps of its highest level.

“If any government doesn’t pay its debt on time, the rating of that government goes to D,” Chambers said today in an interview with Erik Schatzker on Bloomberg Television’s “Inside Track”. “Having said that, we think the government will raise the debt ceiling. They’ve raised it 78 times more or less since 1960, often at the last moment, and we think that will be the case this time.”

President Barack Obama, a Democrat, is trying to reach a compromise with Republican lawmakers who are seeking spending cuts before they agree to raise the nation’s borrowing limit, currently capped at $14.3 trillion. The Treasury has said it has until Aug. 2 before its ability to pay the U.S. debt expires.

One-year credit-default swaps are rising this year as investors seek insurance in case of a U.S. default.

Default Insurance

The contracts climbed to 49.42 basis points as of yesterday in New York from this year’s low of 20.81 basis points in April, according to data provider CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market.

By contrast, one-year credit default swaps are 36.57 basis points for Japan and 143.31 basis points for Spain, according to data compiled by Bloomberg. Credit-default swaps pay the owner if a borrower fails to meet its debt obligations.

Ten-year Treasuries completed their biggest three-day loss this year yesterday, sending benchmark yields up a quarter percentage point.

The rate dropped two basis points to 3.09 percent today as of 8:46 a.m. in London, according to Bloomberg Bond Trader prices, still less than its 10-year average of 4.07 percent.

S&P put the U.S. government on notice in April that the nation risks losing its AAA standing unless policy makers agree on and begin “meaningful implementation” of a plan by 2013 to reduce budget deficits and the national debt. S&P would cut the country’s sovereign rating if a deal on the debt ceiling isn’t reached, affecting all Treasury securities, Chambers said.

'More Chaotic'

A U.S default would cause upheavals in world financial markets that would be “much more chaotic” than after the bankruptcy of Lehman Brothers Holdings Inc. in 2008, he said.

Ratings directly linked to the U.S. government would move in step with any sovereign action, while some Aaa rankings of state and local governments may be vulnerable, Moody’s said in its report yesterday.

The U.S. would risk not winning back its top Aaa credit soon if the nation’s debt limit causes even a short-term default, Steven Hess, the senior credit officer at Moody’s, said earlier this month.

A default stemming from “the debt limit and the political configuration would indicate that, well, this might happen again,” Hess said. “That risk is perhaps not compatible with Aaa.”

Moody’s said on June 2 that it would put the U.S. credit rating under review for a downgrade unless there’s progress on increasing the debt limit by mid-July.

U.S. Debt

U.S. lawmakers are “very likely” to raise the debt ceiling limit before Aug. 2, Fitch Ratings said June 21, even as it reiterated that failure to do so would result in the country being placed on rating watch.

Obama said in a news conference yesterday that a default would hurt the U.S. economy.

“The yellow light is flashing,” he said. “If capital markets suddenly decide, ‘You know what? The U.S. government doesn’t pay its bills, so we’re going to start pulling our money out,’ and the U.S. Treasury has to start to raise interest rates in order to attract more money to pay off our bills. That means higher interest rates for businesses. That means higher interest rates for consumers.”

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