Moody's Releases Statement On Potential Outomes In US AAA Review

Tyler Durden's picture

Just out from Moody's

Potential Outcomes in Review of US Aaa Rating


The prolonged debt ceiling deliberations have increased the possibility of a rating change or outlook change, or both for the United States government's Aaa government bond rating. Nevertheless, it remains our expectation that the government will continue with timely debt service, and that our review for downgrade will more likely than not conclude with a confirmation of the Aaa rating, albeit with a shift to a negative outlook. However, if there were a default on a Treasury debt obligation, a downgrade would likely follow, even if the default were swiftly cured and investors suffered no permanent losses.

Announced July 13, our review was undertaken because of the small-but-rising probability that the Treasury would default on its market debt sometime after August 2 if the ceiling was not raised. The review will conclude when the debt limit is extended for more than a short period of time. Even a short-lived debt default, however, will likely prompt a downgrade. For Moody's, a debt default occurs only when an interest or principal payment on a Treasury security is missed, and does not arise when payment are delayed on other obligations such as federal employee salaries, Social Security, or vender bills.

If the debt limit is not raised before August 2, we believe that the Treasury would give priority to debt service payments and could thus postpone a potential debt default for a number of days. 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.

As to the longer-term outlook on the rating, the limited magnitude of current deficit reduction proposals suggest that even a timely increase in the debt ceiling will lead to the assignment of a negative outlook on the rating. The direction of the US government's debt rating will largely be determined over time by our projections of its deficits and stock of debt, but the focus of our current review for downgrade is the more narrow and more immediate "event risk" associated with a possible debt-ceiling-induced default and the precedent that such a default would carry. We will make an assessment of the government's efforts to stabilize the future path of its debt ratios when the review is concluded.

This issuer comment details how upcoming events may impact our review of and outlook on the US sovereign rating and discusses potential outcomes.


The Review for Downgrade

On July 13 Moody's placed the Aaa US government bond rating on review for possible downgrade because of the small but rising probability that the government would default on its debt sometime after August 2 if the debt limit is not raised. August 2, the date after which the Treasury estimates it will not be able to meet all its obligations, is approaching. Whether this occurs exactly on August 2 or on another date is not certain. Each day that passes without resolution of this issue raises the probability of default, but it is still our expectation that the government will continue with timely debt service on Treasury securities.

The review for downgrade will be concluded when one of two events occurs: (1) a default on debt obligations, resulting in a downgrade, or (2) an increase in the debt limit sufficient to last more than a short period of time, in which case the Aaa rating will likely be confirmed. The review was prompted by the possibility of default in the short term and is not directly related to the arguably more significant long-term fiscal and debt outlook. Therefore, Moody's will conclude the review when the short-term issue is resolved but also assess the government's efforts to stabilize the future path of its debt ratios. The rating may remain under review if there's only a short-term extension of the debt ceiling.

Event 1: The Government Defaults on Debt Obligations What would Moody's consider a default? We do not consider delayed payments for obligations other than debt service to be a default. The government will have to cut its spending by more than 40% after August 2 without an increase in the debt limit, since that is the proportion of spending that has been financed by debt issuance. To do so, it may delay payments for different kinds of obligations, such as the salaries of government employees, Social Security and Medicare payments, payments to companies that have contracts with the government, or debt service.

Governments from time to time make late payments to suppliers, for example, but Moody's does not consider that they have defaulted. Only if such payment arrears become substantial and appear to indicate a solvency problem would they have rating implications. In the present US case, the rise in payment arrears would simply be a substitute for the rise in public debt that would have normally occurred in the absence of the temporary constraint caused by the debt limit and, therefore, have no immediate credit implications. A missed interest or principal payment on a Treasury security, on the other hand, would constitute a default. If this were to occur, which we still consider unlikely, the rating would be downgraded. One scenario would be a downgrade by one notch to Aa1 immediately, with the rating remaining on review for possible further downgrade.

A one-notch downgrade prior to the expected resolution of the default would reflect our view that, even if interest payments were resumed quickly, a return to Aaa in the near future would be unlikely.

After August 2, the first interest payment date on Treasury bonds and notes is August 15, when $31 billion in interest is due. This is the first date that a default on bonds could occur. Based on the well-established monthly pattern of government revenue inflows and the scheduled interest payments on bonds and notes in coming months, the ratio of interest payments to incoming revenues can be calculated. August is one of the months when this ratio is highest during the current year, with interest payments being equivalent to about 20% of estimated revenues. In the following two months, this ratio is much lower. As a result, paying interest in August would potentially be more difficult than in other months, but it is important to note that incoming revenues are substantially higher than payments for interest alone.

In theory, a default could also occur on principal if maturing issues of Treasury bonds, notes, or T-bills could not be refinanced. Such an unlikely scenario would assume that there were no buyers for the new instruments when outstanding issues came due. The first T-bill maturity date after August 2 is August 4, when $59 billion in T-bills mature. 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. It is worth noting that the debt limit was reached on May 16, and the Treasury has had no problem refinancing its maturing debt until now.

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AldousHuxley's picture

There they go again rating junk POS with AAA.


Moodys hired all of those cheating teachers who pass kids to the next grade level when they can't even read the grade levels below?


Moody's Credibility sinks to Junk Status:


"As the housing market collapsed in late 2007, Moody's Investors Service, whose investment ratings were widely trusted, responded by purging analysts and executives who warned of trouble and promoting those who helped Wall Street plunge the country into its worst financial crisis since the Great Depression. A McClatchy investigation has found that Moody's punished executives who questioned why the company was risking its reputation by putting its profits ahead of providing trustworthy ratings for investment offerings."

BigDuke6's picture

AH, keep up the good chat.

You may like to see Jim Roger's thoughts on Moody's


66Sexy's picture

I wish Moody's would stop nibbling on the barrell...

just pull the trigger already. Lets do this shit.

Id fight Gandhi's picture

Pfft, these rating agencies get their marching orders from the banks and uncle sugar.

One notch downgrade Pretty much equals junk.

Ag Tex's picture

Ironically, Moody's and S&P's ratings should be downgraded to "junk".  It's a fraud!

Black Forest's picture

Heh-heh-heh . . .
Have you heard the news?
(News? What news?)
Can't afford no shoes
(Ow! Get a deal on tape)
Have you heard the news?
(News? Can't afford a paper)
Can't afford no shoes

Went to buy some cheap detergent
Some emergent nation got my load
Got my load
Got my toad
That I stowed

Well, well,
Hey lawdy mama,
Can't afford no shoes
Maybe there's a bundle of rags that I could use
Hey anybody,
Can you spare a dime
If you're really hurtin', a nickel would be fine
Hey everybody
Nothin' we can buy
Chump Hare Rama, ain't no good to try

Wah-ooh-wah-ooh WAH-WAH
Wah-ooh-wah-ooh WAH-WAH

Well, well,
Hey lawdy mama,
Can't afford no shoes
Maybe there's a bundle of rags that I could use
Hey anybody,
Can you spare a dime
If you're really hurtin', a nickel would be fine
Hey everybody
Nothin' we can buy
Chump Hare Rama, ain't no good to try



snowball777's picture

"Who cares if you're so poor you can't afford to buy a pair of Mod-a-go-go- stretch elastic pants?" - FZ

dasein211's picture

Robo is right. Sickening as fuck but he is.

WestVillageIdiot's picture

Yep.  Robo could type up tonight's lottery numbers and still get 4 pissed off responses.  Many of his responses may seem baiting or sarcastic but they are dead on.  The big boys in charge are definitely in charge. 

Crisismode's picture



Robo has Zero Credibility on this Forum.




Until you understand that, you are defunct.

Not For Reuse's picture

eat a dick, bitch. Robo has 100x the cred you will ever have

RobotTrader's picture



Bonds traded today as if they were upgraded to AAAA

Ultra superior, gilt-edged, fiat paper, the envy of the world.


hambone's picture

This "crisis" has clearly specified that T holders will be paid above all else.  If there is to be a default, it will be on the old, the infirm, the colored, the average, the children...basically those without lobbyists and representation in DC.

Mr Lennon Hendrix's picture

It's a parlour trick.  When the US government defaults, the BIS/IMF/World Bank will swoop in and tender an agreement with the world to how the new global credit system will function.  A new fiat standard will be issued, "backed" by gold and maybe silver/platinum.  Debt/GDP ratios will be assessed.  Credit standing will be judged.  The Treasurie is making sure that when this happens the Global Banking Cartel is assured the US will "do what it takes" to play their game.

EscapeKey's picture

No way. As part of the IMF membership agreement, one's currency can specifically not be gold-backed.

They don't want to tie it to anything non-dilutable, as dilution IS the game.

Vic Vinegar's picture

Nah, Lennon has it right.

Think about way back in the day when the Fed started.  That currency was gold-backed wasn't it?  The dilution of the new currency will happen eventually, too.  It’s just that your kids and mine will be bitching about how Sasha Obama, IMF Head, has decided to take the SDR off the gold standard. 

hedgeless_horseman's picture

Esacpe Key is right. Currency elasticity is the lifeblood of the banking cartels.  This is all being played according to the rules of the bailout game.  If you want to know the rules, then read The Creature From Jekyll Island, Chapter 2.  The only twist is that the dollar is the reserve currency, but that is about to change concurrent with war and a long period where there is no reserve currency, only resources.

Vic Vinegar's picture

I don't disagree with anything you wrote above but still say Lennon is right.

So let's just kick back with some Dave Mason:

Mr Lennon Hendrix's picture

The name of the game is a One World Government with One Standard Currencie.  The World Bank, France, Russia, and many other States have urged this Standard to be backed by gold.

All sacrifices will be made at all costs to achieve this goal.  This has been the goal of the Dinosaur Kings sinceyear One.

SheepDog-One's picture

Yep and that date is way sooner than most people imagine.

Bonesetter Brown's picture

Say what?

A new global credit system is more likely to come from Facebook than that motley crew.

haibop's picture

this is going to be exciting. Look at Euro today... foam mattress

Oh regional Indian's picture

LH, How deeply is one willign to pierce the Gold story? Beyond and behind Another and his acolytes perhaps, because he dug deep and far into history to deliver his clever, cleverly timed and delivered message. His work, anonymous to boot, is the GOld Standard by which FOFA and his readers base their Freegold thesis.

Then there is the other bedrock, all the gold ever mined would fit three swimming pools (Olympic to boot). Well, a recent temple treasure opening brought out 3-5 tonnes of pure gold, coins and biscuits that is and random, huge statues of gods in pure gold, some 7-8 feet tall. This, then the inner sanctum of th etreasury cannot be opened as it is believed it will expose a crack to the other world, causing instant global melt-down. 

Well, imagine what would happen if a thousand tonnes of gold was discovered there, or ten even. And this is one temple of a thousand at least of it's size, history and loot, in India alone. Then there is the Vatican and SwitzerTemplarland. 

I feel Gold is the ultimate head fake of this game.....

Meanwhile, I am with equal irrationality drawn to Silver. No midas story associated, as fungible as any other "hard" wealth store.

if gold is exhibiting signs of irrational rising that Silver was a scant month and a bit ago, I think thsi August 15th date might be intimately associated with a Dollar/Gold story of epic and historical proportions. Our september surprise might be delivered in August. 15 August 1971 Nix Nix shut the gold window, Hard, on DeGaulle's hand.

Just gut feelings. I'm hedged accordingly.


Agent P's picture

"This "crisis" has clearly specified that T holders will be paid above all else.  If there is to be a default, it will be on the old, the infirm, the colored, the average, the children...basically those without lobbyists and representation in DC."

What choice do they have?  If they don't pay the bondholders, then there will be no bondholders.  If there are no bondholders, they cannot run 40% deficit spending.  If they cannot run 40% deficit spending, the system collapses...not good for all the groups you mentioned above.  Sucks, don't it?

dick cheneys ghost's picture

Anyone see this from goldseek about what the fed might be up 2?

WestVillageIdiot's picture

That was an interesting perspective.  It is amazing how shit that would have seemed like a sci-fi story 10 years ago now seems about as plausible as Lindsay Lohan getting gang-banged at a Shriner's convention. 

haibop's picture

definitely this is very interesting perspective. walk in freezer

JW n FL's picture

Per Feroli, banks and financial institutions can lend their Treasuries to the Fed in exchange for Fed cash in order to ease any credit strains to be caused by a US default.  He was quoted as saying “In general, I think they’d want to temporarily substitute the Fed’s credit in place of the Treasury’s credit.”


JP Morgan Head Economist Feroli.


Credit Strains

Michael Feroli, chief U.S. economist for JPMorgan Chase & Co., said a Fed contingency plan could allow banks and other financial institutions to temporarily lend their Treasury securities to the Fed in exchange for cash. Such a move would be aimed at easing any credit strains caused by a default, he said.

“In general, I think they’d want to temporarily substitute the Fed’s credit in place of the Treasury’s credit,” Feroli said.

Federal Reserve Pays Banks / Wall Street 800% More for Deposits over what “We the People” get paid!

Azannoth's picture

Yes the 1% will be saved at the cost to the 99% untill the 99% starts handing the 1% from the lamposts(not gonna happen soon enough)

Mr Lennon Hendrix's picture

It's a "dead Geithner bounce" Robo.

faustian bargain's picture

Bill Gates just sold 5M shares of MSFT...I think he's going to buy the Turkish army and do a hostile takeover of the Treasury.

Taku's picture

Raising a covert, private army?
No way. Not on the heels of political gridlock.
Just doesn't happen!
...For that matter, who'd think of such a thing?
This time is different.
It can't happen here.
They'll do the right thing.
They're leaders in senior positions.
No one actually went to jail for the financial crisis, so...
We can trust them.
We have to bail them out.

Where's George Lucas when you need him.

trampstamp's picture

He has been selling every day for years. Why do you think the stock doesn't move much. Nothing new.

rockraider3's picture

In other words, the US Government won't let Moody's downgrade their debt.  No surprise there.

haibop's picture

let's see what's going to happen then. reverse phone detective

lizzy36's picture

What Moodys just said it that as long as Washington gets a deal DONE to raise the debt ceiling. ANY DEAL by August 2nd they will not DOWNGRADE. Regardless of the deficit reduction plan presented. Merely maintain a negative outlook.

One wonders what the quid pro quo to Moodys was/is for this non action.


wang's picture
wang (not verified) lizzy36 Jul 29, 2011 5:25 PM

Warren has been strangely silent through all of this, perhaps he received a call from the justice department

Tyler Durden's picture

What is unfuckingbelievable is that Moody's even said it may downgrade the US in the first place. Of course, that was driven purely by the bluff to scare Republicans into submission... Which failed...

And now they are backed into a corner and have to backpedal.

mynhair's picture

Hence they are heretofore and hereafter known as Mooties.

And they do have cooties.

AldousHuxley's picture

At this point, MOONIES have more followers than moody's. Buffet should divest his MCO holdings and buy Unification church.

Use of Weapons's picture

Ratings agencies are merely weapons, and are staffed by loyalists -  I assumed this was common knowledge (??)

i-dog's picture

Which is exactly what Tyler said. Did you have some other point in mind?

Noah Vail's picture

I love it, downgrade after default. Fits right in line with budget reform after bankruptcy and collapse. Lock the door after the house has been robbed.

Mr Lennon Hendrix's picture

Lock the door after the house has been robbed.

Especially if you robbed your house yourself. 

Call the cops!  We've been robbed!