Moody’s: If debt deal fails, U.S. risks credit downgrade

June 2, 2011

Moody’s Investors Service warned Thursday that it may soon downgrade the U.S. credit rating because of mounting concerns that the government will default, adding new urgency to negotiations between President Obama and congressional Republicans over the nation’s debt.

Moody’s, one of the premier credit-rating agencies, said that political gamesmanship over raising the government’s $14.3 trillion debt ceiling has been worse than expected. If progress toward increasing the limit isn’t made by mid-July, Moody’s said it would take another step toward reducing the country’s top-of-the-line AAA rating by putting the United States under review for a possible downgrade.

“The heightened polarization over the debt limit has increased the odds of a short-lived default,” Moody’s said in an analysis.

The Obama administration says a failure to reach a deal to raise the debt ceiling by Aug. 2 will lead the government to default on some of its obligations. If that happens, Moody’s said it was likely to lower the rating, driving up the cost the U.S. government must pay investors to borrow money.

The AAA rating identifies the United States as one of the world’s safest investments — and has helped the government borrow at extraordinarily cheap rates to finance its operations.

Moody’s warning followed an earlier one from Standard & Poor, another credit rating agency, which lowered the U.S. debt outlook in April to “negative” from “positive,” signaling that a downgrade was possible.

So far, investors have shown little concern about the prospect of default. But Moody’s said that it thinks a deal on raising the debt ceiling is less and less likely.

Moody’s report comes as President Obama and congressional Republicans are in tense negotiations. On Thursday, Treasury Secretary Timothy F. Geithner met with nearly 100 House freshmen — the vast majority Republicans — to press them for an increase in the debt limit. House freshmen have continued to question his warnings of a catastrophic default if the debt ceiling isn’t raised by Aug. 2.

“At the end of the day, there is no certainty even on the date, from my perspective,” said Rep. Tim Scott (R-S.C.), one of the leaders of the House freshmen. He pointed out that Geithner had earlier given a different date for a possible default.

But Treasury Department officials said the Moody’s report supported Geithner’s warnings about a default on Aug. 2.

“This simply underscores the need for Congress to move quickly to ensure that the United States can meet all of its obligations, while continuing to work on a consensus approach towards long term fiscal balance,” said Mary Miller, assistant Treasury secretary for financial markets.

House Speaker John A. Boehner (R-Ohio) also found ammunition in the Moody’s report. He noted that it described the discussions over the debt ceiling as an opportune moment for the government to produce a long-range plan for cutting the federal budget deficit. Moody’s said the long-term credit rating would depend on the development of such a plan.

“This report makes clear that if we let this opportunity pass without real deficit reduction, America’s financial standing will be at risk,” Boehner said. “A credible agreement means the spending cuts must exceed the debt limit increase.”

Geithner’s meeting with House freshmen had been scheduled before the Moody’s announcement.

After the session, freshman Rep. Diane Black (R-Tenn.) said that she had drafted a letter to Obama asking for a detailed deficit-reduction plan that could be evaluated by the nonpartisan Congressional Budget Office and for a contingency plan in case Congress does not raise the debt ceiling by Aug. 2.

Other Republicans sounded an upbeat note.

“We obviously have a very serious economic situation that we’re in right now, and we’re going to solve it,” said Rep. Austin Scott (Ga.), the House freshman class president. “And as far as we’re concerned, everything that we got in there from him was a step in the right direction, that we’re having an open and honest dialogue on how we move forward.”

Zachary A. Goldfarb is a staff writer covering the White House, focusing on President Obama’s economic, financial and fiscal policy.
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