The US will likely keep its top-notch credit rating from Moody’s for now, despite the “limited magnitude” of the deficit reduction plans being discussed in Washington, the ratings agency said on Friday.
However, Moody’s warned in a report that the confirmation of the “Aaa” credit would likely come with a negative outlook, meaning there is a risk of a downgrade in the medium term.
That decision will depend on the US economic performance next year and prospects for future -deficit-reduction measures, Moody’s analyst Steven Hess said.
“If we’re convinced that the economy takes off in 2012 and shows very strong growth, that makes the whole process of fiscal consolidation somewhat easier,” Hess said in an interview.
The report from Moody’s came four days before the US says it will run out of cash to pay all of its bills.
In Washington, the US House of Representatives passed a deficit plan that has since been killed in the US Senate and US President Barack Obama told lawmakers before the vote to stop wasting time and find a way “out of this mess.”
Moody’s issued the report to clarify its position on the US debt situation, its chief risk officer Richard Cantor said in the same interview.
“Sometimes there is confusion and all the ratings agencies are grouped together,” he said.
Standard & Poor’s (S&P) has threatened to cut US ratings in the next few months if the lawmakers fail to come up with a meaningful plan to cut the nation’s deficit.
Both agencies seem to agree that deficit-reduction measures of around US$4 trillion would be enough for the US to avoid a ratings downgrade.
The difference is that, while S&P has indicated it may downgrade the US by mid-October if it doesn’t see a meaningful -deficit-reduction plan in place now, Moody’s is willing to give the government more time before making that decision.
Moody’s expects the government will continue to honor bond payments even if lawmakers fail to raise the debt ceiling before Tuesday.
“If the debt limit is not raised before Aug. 2, we believe that the [US Department of the] Treasury would give priority to debt service payments and could thus postpone a potential debt default for a number of days,” Moody’s said in its report.
“Revenues would be more than adequate for some period of time to meet those payments, although other outlays would be severely reduced as a result.”
However, the ratings agency warned that a debt default would likely lead to a ratings downgrade even if it was “swiftly cured and investors suffered no permanent losses.”
Wall Street on Friday ended its worst week in a year, and one equity strategist said the stock market’s direction tomorrow will rely on the weekend’s outcome.
“It exclusively is a function of what does [the US] Congress do over the next 48 hours,” said Phil Orlando, chief equity market strategist at Federated Investors. “If Speaker Boehner is able to get a deal through over the next two days, we trade higher. If we get nothing constructive and a series of more dueling press conferences, we probably open lower.”
Moody’s noted that the first interest payment of US$31 billion on US Treasury debt is not due until Aug. 15.
“This is the first date that a default on bonds could occur,” the report said, highlighting that, this year, next month is when the ratio of interest payments to incoming revenues is at its highest.
The agency sees less chance of a default on Thursday, when T-bills worth US$59 billion mature because it is unlikely the Treasury would not be able to find buyers to refinance them.
“Should the Treasury be unable to find buyers for an equivalent amount, a default might occur. This scenario seems extremely unlikely, given the role of the T-bill market in both domestic and global financial markets,” Moody’s said.
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