Moody’s Places U.S. on Review for Downgrade As Debt Talks Stall

by
July 14, 2011

By John Detrixhe, Bloomberg

Moody’s Investors Service put the U.S. under review for a credit rating downgrade as talks to raise the government’s $14.3 trillion debt limit stall, adding to concern that political gridlock will lead to a default.

The Aaa ratings of financial institutions directly linked to the U.S. government, including Fannie Mae, Freddie Mac, the Federal Home Loan Banks, and the Federal Farm Credit Banks, were also put on review for cuts, Moody’s said in a statement today.

The U.S., rated Aaa since 1917, was put on review for the first time since 1995 on concern the debt limit will not be raised in time to prevent a missed payment of interest or principal on outstanding bonds and notes even though the risk remains low, Moody’s said. The rating would likely be reduced to the Aa range and there is no assurance that Moody’s would return its top rating even if a default is quickly cured.

“It certainly underscores the importance of passing the debt ceiling and not putting us in default status, and making sure there’s a longer term fiscal plan to contain spending and the deficit we’ve been running up over the last few years,” said Anthony Cronin, a Treasury bond trader at Societe General SA in New York, one of the 20 primary dealers that trade with the Federal Reserve. “Maybe it’s the impetus to say we’ll need more of a concession.”

Dollar, Bonds

The dollar weakened and Treasuries were little changed after the Moody’s statement. IntercontinentalExchange Inc.’s Dollar Index, which tracks the greenback against the currencies of six U.S. trading partners, including the euro, yen and pound, slid for a second day, shedding 1.1 percent.

The 10-year note yield was little changed at 2.88 percent at 5:31 p.m. in New York, according to Bloomberg Bond Trader prices, after increasing earlier as much as eight basis points to 2.96 percent. The yield dropped to 2.81 percent yesterday, the lowest since Dec. 1. The price of the 3.125 percent security due in May 2021 declined 1/32, or 31 cents per $1,000 face amount, to 102 2/32.

Treasury Secretary Timothy F. Geithner said he has taken steps to prevent a federal default until Aug. 2, using accounting measures that involve two retirement funds. The U.S. reached its borrowing limit on May 16.

The Moody’s announcement is a “timely reminder” and that Congress must “move quickly” to avoid default, the Treasury said in a statement today.

To read more, visit: http://www.bloomberg.com/news/2011-07-13/u-s-rating-placed-on-review-for-downgrade-by-moody-s-as-debt-talks-stall.html

 

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