Moody's Threatens US Downgrade

In an action that the markets are likely to ignore until the US gets much closer to the August 2 deadline to raise the debt ceiling, Moody’s put America’s Aaa rating on review for possible downgrade.

The credit rating agency said,

Moody’s Investors Service has placed the Aaa bond rating of the government of the United States on review for possible downgrade given the rising possibility that the statutory debt limit will not be raised on a timely basis, leading to a default on US Treasury debt obligations. On June 2, Moody’s had announced that a rating review would be likely in mid July unless there was meaningful progress in negotiations to raise the debt limit.

All three credit ratings agencies have stated that the US ratings were at risk because of the chance of defaults on Treasury debt obligations should the debt cap not be raised.

Moody’s does not know whether there will actually be a default on August 2, even if Congress and the Administration do not act before then. Treasury Secretary Geithner is said to working on a plan to extend the country’s ability to make payments to some time beyond that date. An announcement is not likely to be done until the day of the deadline. Geithner does not want to give up whatever small negotiation edge he has.

Douglas A. McIntyre