Moody's Places US Aaa Government Bond Rating and Related
Ratings on Review for Possible Downgrade
New York, July 13, 2011 -- 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.
In conjunction with this action, Moody's has placed on
review for possible downgrade the Aaa ratings of financial institutions
directly linked to the US government: Fannie Mae, Freddie Mac, the Federal Home
Loan Banks, and the Federal Farm Credit Banks. We have also placed on review
for possible downgrade securities either guaranteed by, backed by collateral
securities issued by, or otherwise directly linked to the US government or the
affected financial institutions.
RATIONALE FOR REVIEW
The review of the US government's bond rating is prompted
by the possibility that the debt limit will not be raised in time to prevent a
missed payment of interest or principal on outstanding bonds and notes.
As such, there is a small but rising risk of a
Moody's considers the probability of a default on
interest payments to be low but no longer to be de minimis. An actual default,
regardless of duration, would fundamentally alter Moody's assessment of the
timeliness of future payments, and a Aaa rating would likely no longer be
appropriate. However, because this type of default is expected to be
short-lived, and the expected loss to holders of Treasury bonds would be
minimal or non-existent, the rating would most likely be downgraded to
somewhere in the Aa range.
The specific rating that would be assigned at the
conclusion of the review once such a default is cured would depend on (1) the
speed with which the default is cured; (2) an assessment of the likely effect
on future borrowing costs; and (3) whether there is a change in process for
raising the debt limit that would preclude another default. A return to a Aaa
rating would be unlikely in the near term, particularly if there were no
progress on the third consideration.
While the debt limit has been raised numerous times in
the past, and sometimes the issue has been contentious, bond interest and
principal have always been paid on time. If the debt limit is raised again and
a default avoided, the Aaa rating would likely be confirmed. However, the
outlook assigned at that time to the government bond rating would very likely
be changed to negative at the conclusion of the review unless substantial and
credible agreement is achieved on a budget that includes long-term deficit
reduction. To retain a stable outlook, such an agreement should include a
deficit trajectory that leads to stabilization and then decline in the ratios
of federal government debt to GDP and debt to revenue beginning within the next
Moody's does not take a position on what measures should
be included in any deficit reduction package. Instead, it is the resultant
deficit and debt trajectories that are relevant to the rating and its outlook.