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Posted at 06:30 PM ET, 07/13/2011

Bachmann and Moody’s negative mood on U.S. default


Rep. Michele Bachmann (R-Minn.) might be an increasingly credible and popular candidate for the Republican presidential nomination, but that doesn’t make her any more in touch with reality or the truth. The latest example is her statement today on the looming national default.

“We cannot go on scaring the American people; we need to be truthful. And I call on the president and the Treasury Secretary to tell the truth to the American people,” Bachmann said today. And on the question of whether economic catastrophe would befall the United States, as has been warned by everyone from President Obama on down to a slew of Wall Street leaders, she said, “We don’t believe that for a moment.”

Well, she and the rest of the raucous Republican caucus better believe it. As if on cue, just moments ago, Moody’s announced it was placing “US Aaa Government Bond Rating and Related Ratings on Review for Possible Downgrade.” This action also involves financial institutions connected to the federal government. Think Fannie Mae, Freddie Mac and Federal Farm Credit Banks. The agency also said that its outlook on the bond rating could be changed “unless substantial and credible agreement is achieved on a budget that includes long-term deficit reduction.” The McConnell plan doesn’t do that.  

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 default.

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.

Default deniers shouldn’t take heart in Moody’s optimism that the default would be short-lived. Not for a minute should they think that it’s no big deal. As I explained earlier through the words of Rob Nichols of the Financial Services Forum, a downgrade from a AAA rating to a AA rating would start a rush of dominoes that could lead to the loss of 1 million jobs.   

To not believe this could happen is to play with fire. To oppose attempts to head off this impending economic catastrophe is to play with fire in a gas-filled room. And as we know, Bachmann has plenty of experience doing that.

By  |  06:30 PM ET, 07/13/2011

 
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