August 19, 2022

Fight Over Debt Ceiling Risks Credit Rating, Moody’s Warns

Moody’s unexpected report follows by six weeks a decision by another major ratings firm, Standard Poor’s, to lower its outlook for the Aaa rating on United States debt – but not the rating itself — to negative from stable. Moody’s cautionary note was more pointed in tying a potential reduction in the rating to current budget politics, and urging a resolution weeks sooner than the White House and Congressional leaders were aiming for.

Moody’s warning was two-pronged. First, it said, if Congress does not raise the $14.3 trillion debt in coming weeks, the nation’s credit rating could be lowered “due to the very small but rising risk of a short-lived default.” That would likely translate into higher interest rates at a time when the recovery is again slowing.

And second, Moody’s warned with an implicit slap at both parties, whether the United States keeps that triple-A rating “will depend on the outcome of negotiations on deficit reduction.”

“Although Moody’s fully expected political wrangling prior to an increase in the statutory debt limit, the degree of entrenchment into conflicting positions has exceeded expectations. The heightened polarization over the debt limit has increased the odds of a short-lived default,” the company’s statement said. The goal of the bipartisan budget talks that began in April at President Obama’s initiation has been to reach agreement on deep long-term spending cuts by Aug. 2. That is when the Treasury department has said it will run out of accounting maneuvers to meet the nation’s financial obligations without breaching the debt limit, which would provoke a crisis, even default.

House Republicans have said they will not agree to increase the debt limit without parallel action on spending cuts of an even greater amount. The debt limit would have to be raised $2.4 trillion to carry the government through 2012 and that year’s elections.

Moody’s action comes a day after House Republican leaders engineered a vote on Tuesday evening in which the House voted overwhelmingly not to increase the debt limit. They said that was their way of proving to Democrats that it could not pass without spending cuts attached, but the Democrats countered that they were risking an adverse market reaction by staging the vote, knowing it would fail.

“This report makes clear that if we let this opportunity pass without real deficit reduction, America’s financial standing will be at risk,” House Speaker John Boehner said in a statement. “A credible agreement means the spending cuts must exceed the debt limit increase. The White House needs to get serious right now about dealing with our deficit and debt.”

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