Tags: us | economy | barack | obama | debt | impasse | congress

Moody’s: US Likely to Raise Debt Limit to Avoid Default

Thursday, 24 Feb 2011 01:57 PM

Moody's Investors Service could put the United States' triple-A credit rating under review for a downgrade if a congressional impasse on extending the debt limit escalates to a point where default appears unavoidable, the agency said Thursday, adding that such a scenario is extremely unlikely.

Moody's expects the U.S. statutory debt limit to be raised before the government hits the current ceiling of $14.3 trillion within a few months. Also, current government funding runs out March 4 as lawmakers battle over the budget for the rest of the fiscal year that ends Sept. 30.

Even if consensus isn't reached in time, the government has several options to avoid missing a debt payment, the agency said in a report.

The U.S. Congress has in the past routinely raised the debt limit, but Republicans, emboldened by election victories, have threatened not to do so unless President Barack Obama and Democrats vow to cut public spending.

In a sign of growing attention to U.S. finances, Moody's decided to make clear the rating actions it could take in case of a U.S. debt default.

"We think it's very unlikely that we are going to reach that stage" of impasse, Steven Hess, Moody's senior analyst for the United States, told Reuters in an interview. "It's really only if they were to actually miss an interest payment that we would have to consider what to do about the rating," he said.

But “some increases in the limit have been contentious and this is particularly likely to occur when one political party has a majority in the House of Representatives and the other occupies the White House, as is currently the case.”

Any rating action, Moody's said, would focus on the speed with which payments are resumed, the longer-term impact on the government's funding costs, and measures taken to avoid a recurrence of the default.

"Will the market completely turn against the U.S. government because they missed one payment, and therefore will borrowing costs be permanently altered?" Hess said, in an example of the issues he would consider in the case of a default.

Moody's believes, however, that Congress and Obama would be forced to take quick action if the administration really misses a debt payment, resolving the default in a few days.

To avoid that drastic outcome, the government can cut spending and keep servicing interest payments even if it is not allowed to issue more debt, Hess argued.

"It's not likely that they will run out of money completely, they still have tax revenues coming in," he said, noting that 60 percent on average of the government's expenditures are financed by incoming tax revenues.

"We believe they would prioritize interest payments."

U.S. debt has more than doubled from about $4.34 trillion in mid-2007 as the government increased spending to bail out the financial system and bring the economy out of recession. The budget deficit has increased to 8.8 percent of the economy from 1 percent in 2007.

© 2017 Thomson/Reuters. All rights reserved.

 
1Like our page
2Share
Headline
Moody's Investors Service could put the United States' triple-A credit rating under review for a downgrade if a congressional impasse on extending the debt limit escalates to a point where default appears unavoidable, the agency said Thursday, adding that such a scenario is...
us,economy,barack,obama,debt,impasse,congress,default,review,ratings
492
2011-57-24
Thursday, 24 Feb 2011 01:57 PM
Newsmax Inc.
 

Newsmax, Moneynews, Newsmax Health, and Independent. American. are registered trademarks of Newsmax Media, Inc. Newsmax TV, and Newsmax World are trademarks of Newsmax Media, Inc.

NEWSMAX.COM
MONEYNEWS.COM
© Newsmax Media, Inc.
All Rights Reserved