US Debt Limit Likely Raised to Avoid Default, Moody’s Says

Congress probably will raise the U.S. statutory debt limit or the government will resort to several options to avoid reaching the threshold to avoid missing payments, Moody’s Investors Service said.

Moody’s doesn’t anticipate placing the nation’s top Aaa credit rating on review for a downgrade even if action to raise the so-called debt ceiling is delayed because the risk of default will remain “extremely” low, the New York-based company said in a statement today. The U.S. has $8.96 trillion of marketable debt outstanding.

“This expectation is based on the long history of debt limit increases, the vast majority of which have occurred before the limit is actually reached,” Steven Hess, senior credit officer in the sovereign risk group at Moody’s wrote in a report today. “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.”

The U.S. debt is projected by the Treasury Department to reach its authorized ceiling of $14.3 trillion within a few months, setting the stage for a congressional showdown over lifting the borrowing limit. 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.

If debt service is interrupted the credit-rating company would consider a downgrade, though a brief lapse in interest payments “would not automatically lead to a ‘penalty downgrade,” Moody’s said.

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.