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13 Jul 2011
New York, July 13, 2011 -- Moody's Investors Service has placed the Aaa bond rating of the
government of the United States on review for possible downgrade given
the rising possibility that the statutory debt limit will not be raised
on a timely basis, leading to a default on US Treasury debt obligations.
On June 2, Moody's had announced that a rating review would
be likely in mid July unless there was meaningful progress in negotiations
to raise the debt limit.
In conjunction with this action, Moody's has placed on review
for possible downgrade the Aaa ratings of financial institutions directly
linked to the US government: Fannie Mae, Freddie Mac,
the Federal Home Loan Banks, and the Federal Farm Credit Banks.
We have also placed on review for possible downgrade securities either
guaranteed by, backed by collateral securities issued by,
or otherwise directly linked to the US government or the affected financial
RATIONALE FOR REVIEW
The review of the US government's bond rating is prompted by the
possibility that the debt limit will not be raised in time to prevent
a missed payment of interest or principal on outstanding bonds and notes.
As such, there is a small but rising risk of a short-lived
Moody's considers the probability of a default on interest payments
to be low but no longer to be de minimis. An actual default,
regardless of duration, would fundamentally alter Moody's
assessment of the timeliness of future payments, and a Aaa rating
would likely no longer be appropriate. However, because this
type of default is expected to be short-lived, and the expected
loss to holders of Treasury bonds would be minimal or non-existent,
the rating would most likely be downgraded to somewhere in the Aa range.
The specific rating that would be assigned at the conclusion of the review
once such a default is cured would depend on (1) the speed with which
the default is cured; (2) an assessment of the likely effect on future
borrowing costs; and (3) whether there is a change in process for
raising the debt limit that would preclude another default. A return
to a Aaa rating would be unlikely in the near term, particularly
if there were no progress on the third consideration.
While the debt limit has been raised numerous times in the past,
and sometimes the issue has been contentious, bond interest and
principal have always been paid on time. If the debt limit is raised
again and a default avoided, the Aaa rating would likely be confirmed.
However, the outlook assigned at that time to the government bond
rating would very likely be changed to negative at the conclusion of the
review unless substantial and credible agreement is achieved on a budget
that includes long-term deficit reduction. To retain a stable
outlook, such an agreement should include a deficit trajectory that
leads to stabilization and then decline in the ratios of federal government
debt to GDP and debt to revenue beginning within the next few years.
Moody's does not take a position on what measures should be included
in any deficit reduction package. Instead, it is the resultant
deficit and debt trajectories that are relevant to the rating and its
In addition to the financial institutions directly linked to the US government,
Moody's has also placed on review for possible downgrade pre-refunded
municipal bonds (which are invested in government or related securities),
certain housing bonds that are supported or guaranteed by the US government,
and other municipal ratings that are directly linked to the rating of
the US government. Bonds issued by the governments of Israel and
Egypt that are guaranteed by the US government were also placed on review
for possible downgrade.
Structured finance securities that hold government-linked debt
as their primary collateral have also been placed on review for downgrade.
These include transactions defeased by US Treasury strips, transactions
backed by FFELP government guaranteed student loans, and US RMBS
backed by government agency mortgages.
Moody's is also publishing today its annual report on the United
States, detailing the factors relevant to the analysis of the government
bond rating. The report, United States of America:
Credit Analysis, can be found at www.moodys.com/USRatingActions.
The rationales and expected timing for today's rating reviews on
the US government's rating and directly related credits were previously
discussed in Moody's Updates on Rating Implications of US Debt Limit,
Long-Term Budget Negotiations and Implications of a US Rating Action
for Other Aaa Issuers.
For a complete list of affected securities and additional analysis,
please visit www.moodys.com/USRatingActions.
Please see the rating methodologies tab on the Credit Policy page on moodys.com
for the relevant methodology for each action.
Please see the ratings tab on the issuer / entity page on moodys.com
for the last Credit Rating Action and the rating history.
Steven A. Hess
VP - Senior Credit Officer
Sovereign Risk Group
Moody's Investors Service, Inc.
MD - Sovereign Risk
Sovereign Risk Group
Moody's Investors Service, Inc.
Moody's Investors Service, Inc.
Moody's Places US Aaa Government Bond Rating and Related Ratings on Review for Possible Downgrade
250 Greenwich Street
New York, NY 10007
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