Moody's Says It Expects To Place US Rating For Downgrade Review If No Progress On Increasing Statutory Debt Limit

Tyler Durden's picture

From Moodys, which now appears to have been hacked by Greece (in what may or may not be considered an act of war): "If the debt limit is raised and default avoided, the Aaa rating will be maintained. However, the rating outlook will depend on the outcome of negotiations on deficit reduction. A credible agreement on substantial deficit reduction would support a continued stable outlook; lack of such an agreement could prompt Moody's to change its outlook to negative on the Aaa rating....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. If this situation remains unchanged in coming weeks, Moody's
will place the rating under review.
Translation: unless America promises to increase its total debt to 120% of GDP in one year, the current debt which is just under 100% will be downgraded.

From Moody's:

New York, June 02, 2011 -- Moody's Investors Service said today that if there is no progress on increasing the statutory debt limit in coming weeks, it expects to place the US government's rating under review for possible downgrade, due to the very small but rising risk of a short-lived default. If the debt limit is raised and default avoided, the Aaa rating will be maintained. However, the rating outlook will depend on the outcome of negotiations on deficit reduction. A credible agreement on substantial deficit reduction would support a continued stable outlook; lack of such an agreement could prompt Moody's to change its outlook to negative on the Aaa rating.
 
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. If this situation remains unchanged in coming weeks, Moody's will place the rating under review.
 
Moody's had previously indicated that its stable outlook on the Aaa rating was based on the assumption that meaningful progress would be made within the next eighteen months in adopting measures to reverse the country's upward debt trajectory. The debt limit negotiations represent a real near-term opportunity for agreement on a plan for fiscal consolidation. If this current opportunity passes, Moody's believes that the likelihood of anything significant being accomplished before the next presidential election is reduced, in part because the two parties each hopes to capture both a congressional majority and the presidency in the
2012 election, after which the winning party could achieve its own agenda. Therefore, failure to reach an agreement as part of the current negotiations would increase the likelihood of a negative outlook in the near term, because the upward debt trajectory would still be in place. At present, this appears the most likely outcome, in Moody's opinion.
 
However, if the debt limit is raised for a short period to allow continued negotiations on a long-term deal, Moody's might delay any rating action on the rating outlook pending the outcome of those negotiations, assuming that the negotiations appeared likely to accomplish a substantive change in the debt trajectory.
 
These developments have the following rating implications.
 
 1) The likelihood that Moody's will place the US government's rating on review for downgrade due to the risk of a short-lived default has increased. Since the risk of continuing stalemate has grown, if progress in negotiations is not evident by the middle of July, such a rating action is likely. The Secretary of the Treasury has indicated that the government will have to drastically reduce expenditure sometime around August 2 if the debt limit is not raised; the initiation of a rating review would precede this date.
 
 2) If a debt-ceiling-related default were to occur, Moody's would likely downgrade the rating shortly thereafter. The extent of and length of time before a downgrade would depend on how factors surrounding the default affect the government's fundamental creditworthiness, including (a) the speed at which the default were cured, (b) an assessment of the effect of the default on long-term Treasury borrowing costs, and (c) measures put in place to prevent a recurrence. However, a rating in the Aa range would be the most likely outcome. Any loss to bondholders would likely be minimal or non-existent, as Moody's anticipates that a default would be cured quickly.
 
3) If default is avoided, the Aaa rating would likely be affirmed after any review. Whether the outlook on the rating would be stable or negative would depend upon whether the outcome of the negotiations included meaningful progress toward substantial and credible long-term deficit reduction. Such reduction would imply stabilization within a few years and ultimately a decline in the government's debt ratios, including the ratio of debt to GDP.

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
oogs66's picture

So if you don't promise to increase your debt we will downgrade your existing debt?  LOL!

Moogy says 'more debt good, less debt bad'   yeah, that makes sense

Did Uncle Warren approve this?

TheTmfreak's picture

That is literally what they're saying.

When has anybody ever used more credit and gotten a better credit rating BECAUSE of the credit? (I thought credit ratings were about the ability to pay back credit based on past experiences...)

If you pay off a credit card, with another credit card... thats not paying off debt.

Dolar in a vortex's picture

Wow! Whose pocket are they in?

AR15AU's picture

Anyone who uses Moodys to make investment decisions is FUCKING INSANE.

camaro68ss's picture

you got to shoot yourself in the face to stay alive.... you guys ready?..... one, two ,three, FIRE!

andybev01's picture

I think it's more akin to selling your children into slavery than shooting yourself but that won't affect me, I have no children.

wisefool's picture

This is my printing press.

This is my tax code.

One is for killing peoples way of life.

The other just makes it more fun.

max2205's picture

This message brought to you (Congress) by the Association of FED and Treasury.

Warning, sideeffects incude vomiting, diahreha, loos of foreskin and testicles, loss of vision and hairloss.

Fuck you Moody's!!!

equity_momo's picture

Youll be shocked to hear that even you sir , a mere plebian , like all of us at ZH , can infact improve your credit rating by taking out more credit or debt.  

I got rid of my mortgage last year and my credit score went from near perfect to average in one fail swoop....   ask around , it happens to every individual or entity. More debt = higher "score" or rating.

I will probably get turned down if i ever want a credit card due to the fact i have savings but no debt.   Bizarro World , one which is going to collapse.  Ho-hum.

centerline's picture

Yup.  They like to a see a combination of debt and good servicing of that debt.  If you fail to have debt (or enough debt) or fail to service the debt, your rating will drop.

LongBalls's picture

Who give's a chit. The money you save by being a debt free customer that pay's in cash far out weights any mere 5% bump in your interest payment for a loan on goods. 

There are a lot of people who wish they were in your position.

 

Congrats!

equity_momo's picture

I rent....

 i just had an out on my property that is now underwater , so i took it. I wont be high fiving until i have zero monthly checks going to my living accomodation.

Robot Traders Mom's picture

Yeah, this fucking kills me. I own a house and am and have been current. I took out a credit card about 5 years ago to bring my "credit" up. I would put $3-4k/month on it and pay it off immediately. They cancelled it on me last year saying something along the lines of no longer fitting into their credit profile.

I have no debt outside of a mortgage, a substantial income, and I have an average credit score.

If I were to go into a BMW dealership today, I would get a shittier rate than a 19 year-old college girl with a part-time job, $20k/yr income, and 8 credit cards.

This is the only proof I need that the world we live in is one giant ponzi.

equity_momo's picture

Its fucked up thats for sure..

im done with worrying about it - most of us here know whats happening. We can either prepare so we are in a better position that the 19yr old college girl , or we can drink to forget and live like the rest of the walking mooks out there.

Sometimes i think theyre happier but id rather understand the game than be a mark.

Robot Traders Mom's picture

Sometimes i think theyre happier but id rather understand the game than be a mark.

+1

max2205's picture

I bet Obamarama would give you a $100k student loan...too bad you can't buy food with it

Thomas's picture

I have no debt whatsoever, own my house, plenty of assets and my credit rating totally sucks.

TheTmfreak's picture

See my post below.

Why should it be assumed that you should be trusted with large amounts of debt if you can't even show you can handle debt responsibly? (by having no debt)

Credit rating is way way over relied upon however.

TheTmfreak's picture

While I'm not arguing for the system, to me it makes sense that you must have some sort of debt to show that you can be responsible with debt.

While I think its ludicrious that overnight somebody's credit score can drop as a result of paying off a mortgage its not that irrational to understand.

Can't handle taking high amount of debt? Why should you have a large credit rating? I do think that credit ratings should take into account asset/debt ratio however. But then again thats the lenders responsibility to look at. The problem I see with the system is the over reliance on some magic number that, like I've stated, doesn't even take into account assets.

Rynak's picture

I get no credit AT ALL, because........ umm, i think it's because i cannot be fired (freelancer)

rsi1's picture

  • of course, otherwise the ponzi ends!

jus_lite_reading's picture

^^THIS^^ Everything else is just noise

Quinvarius's picture

They know we pay the interest on our debt with new debt.  We don't have the tax base to cover it and continue functioning.

Robot Traders Mom's picture

That is exactly right. Moody's/S&P/Fitch rate on the ability to payback their debt, not the strength of their currency.

As fucked up as it is, the US could never theoretically default by not paying, as they are the reserve currency. They can devalue the dollar to infinity, but they will pay, albeit worthless dollars.

This is the fucked up system that we live in. I am a broker and can tell you that the municipal and corporate bond rating system is one of the biggest jokes in the financial system.

Meredith Whitney is not wrong, just early.

centerline's picture

That pretty much sums it up for most people here... just early.

crazyjsmith's picture

Yep, just like the alcoholic who wakes up with a blistering Hangover and thinks the only solution to cure that hangover is to grab a beer and start drinking again. 

Or the Heroin addict who can't stop shaking from withdrawals, feels the only way to cure the shakes is to grab the needle.

Or the starving crackhead who will use his last $5 bucks, not on a burger, but another hit.

 

Hello, my name is Earth, and we clearly have not met. 

 

Citxmech's picture

“If you’re living high on that cheap credit hog,
Don’t look for cure from the hair of the dog.
Real savings come first if you want to invest,
The market coordinates time with interest.

“Your focus on spending is pushing on thread -
In the long run, my friend, it’s your theory that’s dead.
So sorry there, buddy, if that sounds invective,
Prepare to get schooled in my Austrian perspective.

 

Keynes v. Heyak, Pt I.

Good shit there boss.

thriftymost's picture

The Austrian perspective is a rich man's one.  I save money and want govt. to leave me alone--why doesn't everyone else?

Most people, though, don't have any money, or the means to acquire it.  They go into debt because without a mortgage they don't have anywhere to live, without a car lease they can't get to work, and so on.

Austrians, like Objectivists, live in a fantasy world of narcissistic delusions.  It's all a fraud.  And it's utterly inimical to progress.

LongBalls's picture

This is nothing more than a shake down to force Congress to up the debt limit in conjunction with forcing them to make modest cuts in spending that will extend out 5-10 years. Notice the recent take down in the market as insurance. These pukes are not even TRYING to hide it anymore. They own this country. At least until the medium of exchange is changed.

 

mayhem_korner's picture

Ya can't fix stupid...

We're so cooked.

tao400's picture

Wow. Have not looked at the market but am going to right now.

TruthInSunshine's picture

Hey, I remember when Congress initially rejecting TARP and the 8% intraday equities drop that scared the living beejeezus out of 401(k)/IRA/Pension Plan holders, getting them to panic and call their elected representativesTM.

Oldest trick in the book, Moody's.

cougar_w's picture

The plutocrats want that sweet, sweet QE3 sugar so bad they can't stand it. They're going to be pulling out all the stops now br'utha. Everything now, all the time, every day and every night, until The Bernank is just forced -- forced I tell you, oh the humanity -- to print more money for his important friends.

Oh regional Indian's picture

"oh, the humanity" is always funny.

But yes, the summer squeeze is on, and I'm not talkign lemons here.

ORI

 

http://aadivaahan.wordpress.com/2011/05/26/the-video-trailer/

slaughterer's picture

That killed the rally!  Thanks Moody's!

Cdad's picture

What...the whole three minutes worth of it?  I can see where a guy would be pissed about the lost productivity.

 

cougar_w's picture

When did Moodys become a arm of AlQueda? Because this is nothing but terrorism aimed at our freedoms.

/sarc

TheTmfreak's picture

Economic terrorism to be precise.

Putty's picture

This makes perfect sense.

Rynak's picture

.sense makes this, No

That's what you get for computing credit ratings on little-endian hardware.

nathan1234's picture

Republicans own Moody's

Long-John-Silver's picture

The Sheeple will soon demand QE3. The unfolding plan continues.....

cougar_w's picture

Yes the war in the east is proceeding spendidly.

Oh regional Indian's picture

it is, isn't it? The other ring of fire. AfPakIr. Look at poor pakistan especially. Played like patsies through a deeply corrupted government. Every day, it's being made to look like an ungovernable nation, perhaps ready for some martial law again. Then, all bets are off. Pakistan and Tibet are the two fulcrums (Kashmir espicially) for various historical reasons.

Fascinating times, like watching reality kicking fiction's ass.

ORI

cougar_w's picture

Then maybe what you need is some better fiction:

http://madscienceunlimited.com/fiction/aTearForTheSinner.html

Where we answer with a resounding "Yeah baby" the eternal question -- can you really get blood from a turnip?

Oh regional Indian's picture

your writing? Interesting. With the Fed bit, clearly a ZH reader. 

ORI

cougar_w's picture

Mine. And I notice over time that my fictional treatment of the banking class is becoming increasingly harsh. That too, I suppose, is the imprint of a ZH reader.

Hmm. And I was suddenly just wondering what might happen if Fortran "accidentally" hacked into a ratings agency, found a computer running a financial test model and "inadvertently" corrected some faulty assumptions for them as a "service" and didn't actually tell anyone? And the undoctored real results went out on the news wires because nobody actually looks at that this cr*p anymore, you know.

That would be really funny. Ha ha.

Okay gimme a couple days ... this should be good ...

Sokhmate's picture

By Fortran, do you mean the big-titted, blue-skinned hairy angel?