Moody's: Changes in US debt negotiations could push rating change

Moody’s has an “Aaa” rating for the US government with a stable outlook

New York (Armfalcon.com) – Ratings agency Moody’s expects the US government to continue to pay its debts on time, but public statements from lawmakers during debt ceiling negotiations could prompt a change in the assessment of the US credit outlook ahead of a potential default, a senior analyst said.

Investors use credit ratings as one of the metrics to determine the risk profile of governments and companies.

Generally, the lower the borrower’s rating, the higher the cost of funding. That means a possible downgrade of the US government could affect the price of trillions of dollars of government debt securities.

Investors will have to deal with that risk ahead of a June 1 deadline presented by the US Treasury for raising the government’s $31.4 trillion debt limit, with Democrats and Republicans still deeply divided over how to curb the federal deficit.

Moody’s has an “Aaa” rating for the US government of stable outlook – the highest creditworthiness evaluation Moody’s grants borrowers.

Fitch also rates the US government “AAA”. S&P Global’s rating is “AA-plus,” the second highest.

S&P stripped the United States of its coveted top rating over a debt ceiling dispute in Washington in 2011, days after a deal the agency said at the time did not stabilize “medium-term debt dynamics.”

Moody’s expects lawmakers will eventually reach an agreement to raise the lending limit this time. But it is setting up for protracted negotiations and a potential interim solution, William Foster, senior vice president at Moody’s, told Reuters.

The US government would be considered in default if it missed debt payments, which would trigger a downgrade by the rating agency of one notch to “Aa1.”

But Moody’s could act before default by changing its outlook on the US government to negative from stable if lawmakers indicate that default is likely, Foster said. A change in the outlook would reflect a material increase in the likelihood of a rating downgrade.

“Such a state can occur if public messages from both parties or from a lead negotiator indicate that they are seriously considering defaulting, and they are comfortable that this is a viable option,” Foster said.

“If we approach the X-date and there appears to be a change in tone that appears significant, material, and changes the overall probability analysis, … that’s the only basis for a potential change prior to a missed payment,” he said.

The X-date is when the government can no longer pay all of its bills. US Treasury Secretary Janet Yellen on Sunday (21/5/2023) said June 1 remained a “difficult deadline” to raise the federal debt limit.

Moody’s placed the United States’ Aaa rating on review for a possible 2011 downgrade several weeks before the debt limit agreement was reached.

Due to the tight time frame, Foster said he continues to look for a debt ceiling agreement in the summer or at the end of the US fiscal year in September, with lawmakers likely to approve a temporary short-term suspension of the cap.

If the government reaches date X with no deal, Moody’s expects repaying the principal of the debt due will not be risky because the Treasury can auction off new debt to repay old debt while remaining below the existing debt limit.

However, interest payments need to be prioritized to avoid default. “If that’s the scenario, we hope it happens,” Foster said.

In the event of a missed payment, Moody’s would downgrade the government one notch, even in the case of a brief default.

“This situation will be based on something that was avoidable, that was foreseeable, but it happened because of politics,” he said.

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source: www.antaranews.com

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