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Global Credit Research - 02 Jun 2011
New York, June 02, 2011 -- Moody's Investors Service said today that if there is no progress
on increasing the statutory debt limit in coming weeks, it expects
to place the US government's rating under review for possible downgrade,
due to the very small but rising risk of a short-lived default.
If the debt limit is raised and default avoided, the Aaa rating
will be maintained. However, the rating outlook will depend
on the outcome of negotiations on deficit reduction. A credible
agreement on substantial deficit reduction would support a continued stable
outlook; lack of such an agreement could prompt Moody's to
change its outlook to negative on the Aaa rating.
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 heightened
polarization over the debt limit has increased the odds of a short-lived
default. If this situation remains unchanged in coming weeks,
Moody's will place the rating under review.
Moody's had previously indicated that its stable outlook on the
Aaa rating was based on the assumption that meaningful progress would
be made within the next eighteen months in adopting measures to reverse
the country's upward debt trajectory. The debt limit negotiations
represent a real near-term opportunity for agreement on a plan
for fiscal consolidation. If this current opportunity passes,
Moody's believes that the likelihood of anything significant being
accomplished before the next presidential election is reduced, in
part because the two parties each hopes to capture both a congressional
majority and the presidency in the 2012 election, after which the
winning party could achieve its own agenda. Therefore, failure
to reach an agreement as part of the current negotiations would increase
the likelihood of a negative outlook in the near term, because the
upward debt trajectory would still be in place. At present,
this appears the most likely outcome, in Moody's opinion.
However, if the debt limit is raised for a short period to allow
continued negotiations on a long-term deal, Moody's
might delay any rating action on the rating outlook pending the outcome
of those negotiations, assuming that the negotiations appeared likely
to accomplish a substantive change in the debt trajectory.
These developments have the following rating implications.
1) The likelihood that Moody's will place the US government's
rating on review for downgrade due to the risk of a short-lived
default has increased. Since the risk of continuing stalemate has
grown, if progress in negotiations is not evident by the middle
of July, such a rating action is likely. The Secretary of
the Treasury has indicated that the government will have to drastically
reduce expenditure sometime around August 2 if the debt limit is not raised;
the initiation of a rating review would precede this date.
2) If a debt-ceiling-related default were to occur,
Moody's would likely downgrade the rating shortly thereafter.
The extent of and length of time before a downgrade would depend on how
factors surrounding the default affect the government's fundamental
creditworthiness, including (a) the speed at which the default were
cured, (b) an assessment of the effect of the default on long-term
Treasury borrowing costs, and (c) measures put in place to prevent
a recurrence. However, a rating in the Aa range would be
the most likely outcome. Any loss to bondholders would likely be
minimal or non-existent, as Moody's anticipates that
a default would be cured quickly.
3) If default is avoided, the Aaa rating would likely be affirmed
after any review. Whether the outlook on the rating would be stable
or negative would depend upon whether the outcome of the negotiations
included meaningful progress toward substantial and credible long-term
deficit reduction. Such reduction would imply stabilization within
a few years and ultimately a decline in the government's debt ratios,
including the ratio of debt to GDP.
Steven A. Hess
VP - Senior Credit Officer
Sovereign Risk Group
Moody's Investors Service
MD - Sovereign Risk
Sovereign Risk Group
Moody's Investors Service
Moody's Investors Service
Moody's Updates on Rating Implications of US Debt Limit, Long-Term Budget Negotiations
250 Greenwich Street
New York, NY 10007
No Related Data.
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