Moody's Warns Of 1 Notch Downgrade If A Bitterly Divided Congress Does Not Begin To Cooperate

Tyler Durden's picture


13 months ago, in the aftermath of the debt ceiling fiasco, which we now know was a last minute compromise achieved almost entirely thanks to the market plunging to 2011 lows, S&P had the guts to downgrade the US. Moody's did not. Now, it is Moody's turn to fire up the threat cannon with a release in which it says that should the inevitable come to pass, i.e. should congressional negotiations not "lead to specific policies that produce a stabilization and then downward trend in the ratio of federal debt to GDP over the medium term" then "Moody's would expect to lower the rating, probably to Aa1" or a one notch cut. Moody's also warns that should a repeat of last year's debt ceiling fiasco occur, it will also most likely cut the US. Of course, that the US/GDP has risen by about 8% since the last August fiasco has now been apparently forgotten by both S&P and Moodys. Sadly, continued deterioration in the US credit profile is inevitable, as every single aspect of modern day lives that is "better than its was 4 years ago" has been borrowed from the future. More importantly, with the S&P at multi year highs courtesy of Bernanke using monetary policy to replace the need for fiscal policy, Congress will see no need to act, and Moody's warning will be completely ignored. This will continue until it no longer can.

From Moody's:

Budget negotiations during the 2013 Congressional legislative session will likely determine the direction of the US government's Aaa rating and negative outlook, says Moody's Investors Service in the report "Update of the Outlook for the US Government Debt Rating."


If those negotiations lead to specific policies that produce a stabilization and then downward trend in the ratio of federal debt to GDP over the medium term, the rating will likely be affirmed and the outlook returned to stable, says Moody's.


If those negotiations fail to produce such policies, however, Moody's would expect to lower the rating, probably to Aa1.


Moody's views the maintenance of the Aaa with a negative outlook into 2014 as unlikely. The only scenario that would likely lead to its temporary maintenance would be if the method adopted to achieve debt stabilization involved a large, immediate fiscal shock—such as would occur if the so-called "fiscal cliff" actually materialized—which could lead to instability. Moody's would then need evidence that the economy could rebound from the shock before it would consider returning to a stable outlook.


Moody's notes that it is difficult to predict when during 2013 Congress will conclude negotiations that result in a budget package. The Aaa rating, with its negative outlook, is likely to be maintained until the outcome of those negotiations becomes clear.


The rating outlook also assumes a relatively orderly process for the increase in the statutory debt limit, says Moody's. The debt limit will likely be reached around the end of this year, and the government's ability to meet interest and other expenses out of available resources would likely be exhausted within a few months after the limit is reached.


Under these circumstances, the government's rating would likely be placed under review after the debt limit is reached but several weeks before the exhaustion of the Treasury's resources. Moody's took a similar action during the summer of 2011.

And this is where we stand: Moody's has basically said that unless the red line stop going from the lower left to the upper right it may, just may, do something:

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Tue, 09/11/2012 - 09:02 | 2781275 diogeneslaertius
diogeneslaertius's picture

forget it jake, its Chinatown

Tue, 09/11/2012 - 09:06 | 2781292 malikai
malikai's picture

It's cool. The top is rounding off. We'll be at zero public debt by 2105 based on my calculus.

Tue, 09/11/2012 - 09:13 | 2781326 JPM Hater001
JPM Hater001's picture

If it isn't we should take away toys in the bathtub.

That'll teach'em a lesson.

Tue, 09/11/2012 - 11:13 | 2781821 CrashisOptimistic
CrashisOptimistic's picture

Uhm, isn't this backards?

If Congress reaches a deal, it will be to gut the Sequester and spend more money.  It will be to continue the tax cuts and have lower revenue.

Both of those increase the deficit and worsen debt.

If there is no deal, spending is slashed.  Taxes go up.  Yes, there will be a recession and tax revs will be lower because of it (than with no recession) but tax revs may be higher even with the recession as a result of the tax increases. 

All of which means lower deficit and better debt profile.  

So why isn't Moody's saying "if you get a deal and the deficit is therefore not slashed, we cut your rating"?

Tue, 09/11/2012 - 12:49 | 2781898 smlbizman
smlbizman's picture

so is this the princeton offense, where b.o.e passes the ball to lloyd, lloyd hits ben at half court, ben sees obama at the top of the key, 1 bounce to obama, obama sees warren at the hoop, throws a lob to warren , who fakes the slam and kicks it out to moodys at the three point line, who with congress or better known as the washington generals, in its face  drains the three....

Tue, 09/11/2012 - 09:03 | 2781278 Northeaster
Northeaster's picture

Why is anyone taking what a rating agency states seriously, minus maybe Egan-Jones?

Tue, 09/11/2012 - 09:16 | 2781341 LawsofPhysics
LawsofPhysics's picture

Because these "independent" agencies are part of the corrupt status quo.  Simply more paper-pushing fucknuts stealing wealth without creating anything of real value.  Bloody sheep.

Tue, 09/11/2012 - 09:29 | 2781383 Zero Debt
Zero Debt's picture

Along with the independent Federal reserve, independent auditors, independent media, independent (and non partisan) congressional budget office, independent ECB, independent ESM, independent economists, and so on.

Tue, 09/11/2012 - 09:33 | 2781401 LawsofPhysics
LawsofPhysics's picture

Correct, one corrupt mess of paper-pushing theives.  Fuck them all.  Build wealth and trust in your friends and neighbors, you are gonna need each other shortly.  The world needs to learn what real wealth and value are again.  The last time this happened there were less than a billion people on earth and the direct death toll was over 70 million.  Hedge accordingly.

Tue, 09/11/2012 - 09:48 | 2781432 Zero Debt
Zero Debt's picture

We may be heading for a new cycle where skills for reducing systemic risk exposure by increasing independence at a local level will be in high demand.

Tue, 09/11/2012 - 09:59 | 2781486 LawsofPhysics
LawsofPhysics's picture

They already are.  we have been bringing considerably more of our produce to local farmer's markets.  We don't make any more money on these sales, but the headache is considerably less. and it does reduce the carbon footprint of the business.

Tue, 09/11/2012 - 09:46 | 2781442 goldfish1
goldfish1's picture

Please expound. To what time period are you referring?

Tue, 09/11/2012 - 10:00 | 2781488 LawsofPhysics
LawsofPhysics's picture


Tue, 09/11/2012 - 10:35 | 2781650 pupton
pupton's picture

Not only that, but why is anyone taking the official "Debt/GDP" statistic seriously? 

That number is a fraud because the numbers used in the calculation are fraudulent.  All "they" have to do is round a decimal up instead of down and viola, GDP growth outpaced debt growth.  Like any government statistic, it's all a lie. See for those who somehow have never heard of this concept.

The shit is hitting the fan in "super-slow-mo" and all it takes to see it is the attention span to watch it fly and anticipate its trajectory, without being distracted with media shennanigans.  Then instead of watching the "dope show" you can get busy preparing your shit shield and/or getting the heck out of the room.

Tue, 09/11/2012 - 09:03 | 2781281 PrintingPress
PrintingPress's picture

I think we can all agree that printing is the best solution to any money problem!

Tue, 09/11/2012 - 09:04 | 2781282 HelluvaEngineer
HelluvaEngineer's picture

ROTFLMAO - What are you waiting for?

Tue, 09/11/2012 - 09:14 | 2781334 JPM Hater001
JPM Hater001's picture

It's called bad parenting. 

Ever told your kids to stop fighting?

Then threatened trouble if they continue...on and on with no real action.

Thats Moody's

Tue, 09/11/2012 - 09:04 | 2781286 youngman
youngman's picture

All the Politicians will do is sic the government lawyers on them.....outlaw ratings agencies....start their own.....

Tue, 09/11/2012 - 09:58 | 2781481 Urban Redneck
Urban Redneck's picture

Pirating the current EU model.

Tue, 09/11/2012 - 09:05 | 2781287 Jlmadyson
Jlmadyson's picture

And here we go again.

What have these people solved?


Beyond banana republic for both Europe and the US.

S&P so quiet lately......

And let us not forget Fitch always threatening for the next year and the next right.....

Tue, 09/11/2012 - 09:29 | 2781385 Sudden Debt
Sudden Debt's picture

Actually, I live in a potato republic.... It's to cold to grow bananas....


Tue, 09/11/2012 - 09:05 | 2781288 Dr. No
Dr. No's picture

Who cares about the ratings.  As if the FED, the number one buyer, looks at the credit rating prior to writing a $T check.

Tue, 09/11/2012 - 09:58 | 2781482 odatruf
odatruf's picture

It does make you wonder what it would take for the Fed to be forced to buy 100% of the new and roll over notes. At two-thired to three-quarters of all net new floats, we are not far off.

I think I'll add some zeros to my digital bank account with my right hand and then loan it all to my left hand...

Tue, 09/11/2012 - 09:06 | 2781291 fonzannoon
fonzannoon's picture

"The rating outlook also assumes a relatively orderly process for the increase
in the statutory debt limit, says Moody's"

These motherfuckers are more evil than they are stupid. Basically saying we will leave you alone as long as you RAISE the debt ceiling and don't fight about it. We are accelerating into the brick wall at this point. Where is the fucking handle to open the door and jump out?

Tue, 09/11/2012 - 09:08 | 2781298 Dareconomics
Dareconomics's picture

It doesn't matter what Congress does. Uncle Ben will just turn the money machine up to 11:

Tue, 09/11/2012 - 09:08 | 2781299 fonzannoon
fonzannoon's picture

I would argue the fed eagerly awaits ratings cuts to the US at this point. That will probably be the mechanism to herd more sheep into the safety of treasuries.

Tue, 09/11/2012 - 09:32 | 2781396 Quinvarius
Quinvarius's picture

And that statement makes sense to 2 other people.

Tue, 09/11/2012 - 09:09 | 2781303 LongSoupLine
LongSoupLine's picture



Only one notch?...shit, that should have been done years ago...fucktard Moody's.

Tue, 09/11/2012 - 09:09 | 2781304 Vincent Vega
Vincent Vega's picture

I think that I am familiar with the fact that you are going to ignore this particular problem until it swims up and BITES YOU ON THE ASS.  ~Hooper

Tue, 09/11/2012 - 09:37 | 2781409 pods
pods's picture

We're gonna need a bigger boat.

Tue, 09/11/2012 - 10:55 | 2781731 edifice
edifice's picture

Yeah, to sink my gold in...

Tue, 09/11/2012 - 17:13 | 2783190 Colonel Klink
Colonel Klink's picture

Sorry the Titanic already sank!

Tue, 09/11/2012 - 09:09 | 2781305 Shizzmoney
Shizzmoney's picture

Let's be honest, they haven't downgraded yet because their owners haven't hedged their positions yet.

Once the Euro conclusion is taken place, the hedge funds and big bank investment arms will make thier bets, and tell Moody's on when to downgrade US Debt.  The DOW tanks, they hedge, and make millions.

Easy game.

Tue, 09/11/2012 - 09:09 | 2781307 BanjoDoug
BanjoDoug's picture

The Republicans have bent to cooperate with the Democrat agenda for decades - which they had to since the demos controlled both houses most of the time.    But now when the "Cliff" is near, the Demos won't budge one inch off their irresponsible spending habits.  This is not gonna end well....

Tue, 09/11/2012 - 09:15 | 2781338 Bicycle Repairman
Bicycle Repairman's picture

Plenty of Republicrat control and spending during the Bush years.  Try again.

BTW, I'm not voting for Romney.

Tue, 09/11/2012 - 09:52 | 2781464 goldfish1
goldfish1's picture

are you voting at all?

how does the surety of a diebold outcome jive with "voting"

Tue, 09/11/2012 - 09:56 | 2781475 Bicycle Repairman
Bicycle Repairman's picture

I'm voting Libertarian, so the Republicrats can count the votes they lost because they dissed Ron Paul.

Tue, 09/11/2012 - 17:14 | 2783193 Colonel Klink
Colonel Klink's picture

Because at least it will be audited by Arthur Anderson.....errrr I mean Accenture!

Tue, 09/11/2012 - 10:18 | 2781560 blunderdog
blunderdog's picture

Sadly, I suspect that post is not a joke.

Tue, 09/11/2012 - 09:09 | 2781308 johnnymustardseed
johnnymustardseed's picture

Congress agreeing will not happen and it does not matter. Moody's could downgrade to FFF- with outlook chaos and the FED will continue to lend Primary dealers at less than a quarter of one percent and those dealers will buy the treasuries and the tax payers will fund the banks to the tune of 500 billion a year. That is how a ponzi works.

Tue, 09/11/2012 - 10:23 | 2781463 kito
kito's picture

@banjodoug---You dont get it......congress cooperates quite well.....both parties are well aware that the deficit spending is the only way the country eeks out a paltry 1% growth in gdp.....both parties pump money into the system to prop up the economy through the untouchable channels....public welfare and military welfare.....both parties have no intention of making tough choices so they continue to divide and conquer......make sure the sheep stay riled up at the other party......oh...and take a look at the bills that have gutted your constitutional rights....all passed by both parties with flying colors.......congress has been agreeing with each other for quite some time.........

Tue, 09/11/2012 - 10:28 | 2781611 in-Credible Banker
in-Credible Banker's picture

Is anyone aware of a public analysis of the PD banks' balance sheets that shows what would be a requisite increase in the line item "Treasury and Agency Securites Held for Sale"??

Tue, 09/11/2012 - 09:11 | 2781311 Jlmadyson
Jlmadyson's picture

Yea it will be a real orderly process on the debt ceiling.

It's also a joke Timmy G can ravage Federal pensions for months before they even have to do anything about it.

Moreover how in the world do they expect them to get the ratio down in this environment? Have they even had a budget in the last 4 years? 1T+ deficit spending each year not so much of a budget.

As someone already mentioned there is zero point in waiting for some spring miracle that ain't happening.

No need to wait.

Just cut it.

Tue, 09/11/2012 - 09:11 | 2781315 otto skorzeny
otto skorzeny's picture

Honey Badger don't give a shit about downgrades.

Tue, 09/11/2012 - 09:11 | 2781316 Bicycle Repairman
Bicycle Repairman's picture

They're cooperating alright.  They've agreed to look the other way while the fiscal cliff hits.  They'll brag about how they avoided the "automatic" cuts.  The increased taxes are the fault of the other guy.

Tue, 09/11/2012 - 09:11 | 2781317 Roland99
Roland99's picture

at least our yields aren't >5% on the treasuries. Imagine our interest bill if they were?


Tue, 09/11/2012 - 09:12 | 2781318 Bicycle Repairman
Bicycle Repairman's picture

We'll get a slew of new taxes to soothe the rating agencies.  I know I'll sleep better.

Tue, 09/11/2012 - 09:11 | 2781319 Desert Irish
Desert Irish's picture

Paging Tim Geithner  Stat......


Tue, 09/11/2012 - 09:20 | 2781353 GetZeeGold
GetZeeGold's picture



I've got a bootleg version of Turbo's totally yours if you need it.


Tue, 09/11/2012 - 09:12 | 2781324 BurningFuld
BurningFuld's picture

If you have the ability to leave the USA please do so NOW! 75% of GDP to over 100% of GDP in 3 years! That is insane.

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