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Post Partisan
Posted at 04:26 PM ET, 06/02/2011

Moody’s U.S. downgrade warning: the fiscal rapture cometh?


Tomorrow promises to be an ugly day for the economy. The May unemployment numbers come out. And judging by yesterday’s drop in the Dow Jones Industrial Average because of an anemic private-sector payroll report from Automatic Data Processing, the Labor Department is on deck to announce that not enough jobs were created for all those who want to work and to help pull the economy out of its sluggish rebound.

The back-and-forth between the Republicans on Capitol Hill and the Democrats in the White House over debt, deficits and the debt ceiling isn’t helping matters. If the legal limit on national borrowing is not raised by Aug. 2 a fiscal rapture will assuredly happen on that date. Speaker Boehner emerged from a meeting with President Obama yesterday to demand a deal by the end of month. While that pronouncement might sound rather bellicose, it has the virtue of buying Boehner some time before Aug. 2 to rally his raucous Republican caucus around said deal.

 But the announcement this afternoon from Moody’s ought to strengthen the speaker’s hand in that quest. It should also add to the sense of urgency to get this thing done.

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.

“The heightened polarization over the debt limit has increased the odds of a short-lived default,” the ratings agency warned. “If this situation remains unchanged in coming weeks, Moody’s will place the rating under review.” This comes after another rating agency — Standard and Poor’s — downgraded its long-term outlook on U.S. debt from “stable” to “negative.”

The full faith and credit of the United States is being questioned for the first time in its history. When that questioning turns to a lack of faith in this nation to pay its bills, pray.

By  |  04:26 PM ET, 06/02/2011

 
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