US-Serious Problems-May Lose Credit Rating
 

Moody's puts U.S. ratings on review for downgrade


Reuters, 14 July, 2011


(Reuters) - The United States may lose its top-notch credit rating in the next few weeks if lawmakers fail to increase the country's legal borrowing limit and the government misses debt payments, Moody's Investors Service warned on Wednesday.


Moody's is the first of the big-three credit rating agencies to place the United States' Aaa rating on review for a possible downgrade, meaning the agency is close to cutting the country's rating.
Standard & Poor's placed the U.S. rating on negative outlook on April 18 which meant a downgrade is likely in 12-18 months.
"They are worried they are having these ideological arguments while Rome burns," said Carl Kaufman, portfolio manager at Oster weis Capital Management in San Francisco.


A lower credit rating would cause havoc in financial markets around the world and increase borrowing costs for the government and businesses, further harming public finances and weighing on the economic recovery.
In a statement, Moody's said it sees a "rising possibility that the statutory debt limit will not be raised on a timely basis, leading to a default on U.S. Treasury debt obligations."
Risks of a default on Treasuries, traditionally seen as the world's safest investment, have increased since the government reached its legal borrowing limit of $14.294 trillion on May 16.
Congress has refused to raise the statutory borrowing limit until agreement is reached on cutting the fiscal deficit which was $1.29 trillion in the last fiscal year.
The Treasury Department has said if the debt ceiling is not raised by August 2 it will have to start prioritizing payments.


DEFAULT RISK NO LONGER "DE MINIMIS"

Moody's said the probability there will be a default on interest payments is low, but it is "no longer to be de minimis."
"If the debt limit is raised again and a default avoided, the Aaa rating would likely be confirmed," Moody's said.
"However, the outlook assigned at that time to the government bond rating would very likely be changed to negative at the conclusion of the review unless substantial and credible agreement is achieved on a budget that includes long-term deficit reduction," the firm said.


There is precedent for Moody's decision. In 1996 the firm put some issues of the Treasury debt on watch for a downgrade when the White House and Congress failed to extend the government's debt ceiling.
Moody's decision came after U.S. markets had closed on Wednesday but before Asian markets ramped up their activity. In the 24-hour currency markets the U.S. dollar index, which measures the greenback against a basket of trading partner currencies, had fallen earlier in the session and ended down 1.1 percent, marking the steepest one-day decline since early December.




"In the short-term, the dollar definitely has its problems. This ratings news sent the dollar tumbling. This is really not good," said Brian Dolan, chief strategist at Forex.com of Bedminster, New Jersey.
"Moody's might be doing this based on the politics as much as the threat of default, because the politics have become so problematic.... Between this and (Ben) Bernanke talking about QE3, the dollar could be entering a new downward phase," he said.
The U.S. dollar fell on Wednesday after Federal Reserve Chairman Ben Bernanke said the central bank could inject more monetary stimulus into the economy.


The currency fell to a record low against the Swiss franc. The greenback hit a trough of 0.8095 franc, on electronic trading platform EBS.
In after-hours trade, stock futures dropped 4.8 points to 1307.20 following Moody's decision.


COLLATERAL IMPACT

In addition, the credit ratings for institutions directly linked to the U.S. government were also put on review for a possible downgrade, including Fannie Mae, Freddie Mac, the Federal Home Loan banks and the Federal Farm Credit banks.
The ramifications of a U.S. downgrade could also be felt in places such as Israel and Egypt.
Moody's says the specific bonds issued by these two governments which carry a U.S. government guarantee "were also placed on review for possible downgrade." Israel and Egypt issue bonds without Washington's guarantee, and presumably they would not be subject to the current situation.
The US Congress has routinely raised the nation's debt limit in the past. This time, however, negotiations seem to have stalled over the degree to which the fiscal deficit should be cut by raising taxes or cutting spending.


So far, Treasury Secretary Timothy Geithner has been able to resort to extraordinary measures to delay a debt default by at least August 2.
Unlike Fitch, which promised to cut the U.S. ratings to "restricted default" after a few missed debt payments, Moody's has said it would downgrade the United States to the "Aa" range, still considered investment grade.
(Reporting by Walter Brandimarte and Daniel Bases)




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Re: US-Serious Problems-May Lose Credit Rating
 

Stark realities of U.S. life without credit

Reuters 14 Jul, 2011 13:49 EDT

Amid the political fingerpointing over which party will catch the blame if Congress fails to raise the $14.3 trillion debt limit, comes the stark reality of what bills get paid after Aug. 2, if the U.S. government can’t borrow more money.


http://blogs.reuters.com/frontrow/fi...1/07/bull1.jpg




A group of House Republicans wrote a letter to President Barack Obama on Thursday to say there would be plenty of money from tax receipts to make interest payments to creditors, pay Social Security retirement benefits, cover Medicare health payments and pay U.S. military troops.
Senate Democrats at a news conference made clear that once those bills were paid, little would be left for anything else.
“It would require the Treasury to make some very dark and difficult choices,” said Senator Charles Schumer, a member of the Senate Democratic leadership.


The U.S. monthly revenue totals $172 billion, while its monthly obligations total $307 billion. Payments for Social Security, Medicare and Medicaid, interest on the debt, troops and defense needs will gobble up the entire monthly income.
There would be no money for student loans just as young people are heading back to school, no money for the Federal Bureau of Investigation, border security, health research, food inspections, Schumer said.
“You don’t have anyone at the border, anyone doing food inspections, anyone in the FAA (air traffic control) towers. America would come to a grinding halt,” Schumer said.
On top of that, global financial markets would punish the United States and interest rates would rise throughout the economy.


Democrats are betting that the stark reality of failing to raise the debt limit will push congressional Republicans toward compromise on a roughly $4 trillion deficit reduction package that has both spending cuts and tax increases. Such a package would help clear the way for Congress to raise the credit limit. But Republicans want only spending cuts and no tax increases.
Democrats argue that a balanced approach is needed to prevent steeper cuts to Medicare and Medicaid health programs and Social Security.


A new poll by Quinnipiac University found that the public might be more likely to blame Republicans if a deal is not reached. Also, 67 percent agree that the deficit package should include tax hikes for the wealthy and big corporations as well as spending cuts.
Photo Credit: Reuters/Mike Segar (The Wall Street Bull sculpture in lower Manhattan)