Weeks ago, the Treasury Department announced that August 2 would be the final deadline for Congress to increase the debt ceiling after which the U.S. would lose its ability to borrow money to cover financial obligations. Some lawmakers scoffed at the deadline, arguing that it was simply a scare tactic from the Administration to force through an increase and suggesting the U.S. could ultimately benefit from a default.
However, recent news regarding the stability of the country’s credit rating has indicated that the August 2 deadline is far from just a political ploy. Yesterday, Moody’s Investors Service warned that it was reviewing the United States’ credit rating and could soon downgrade it from the top Aaa rating. A downgrade would result in higher interest rates, slower growth and job losses. If the lawmakers are unable to come to an agreement on the debt ceiling and the ultimate outcome is default, the agency said this would “fundamentally alter Moody’s assessment of the timeliness of future payments, and a Aaa rating would likely no longer be appropriate.”
Additionally, Moody’s cautioned that, even if a default is avoided, the outlook for our Aaa rating would remain negative if a “substantial and credible agreement” is not also reached to tackle our budget deficit in a timely manner.
The affects of a default would hardly be contained to the federal level. Bloomberg reports that “[a]t least 7,000 top-rated municipal credits would have their ratings cut if the U.S. government loses its Aaa grade….Additionally, top-rated securities with no direct links to the national government will be reviewed for similar action.”
And just in case lawmakers needed more evidence of the gravity of the situation, Standard & Poor’s (S&P) made a similar announcement this morning. Reuters reports:
Standard & Poor’s has warned U.S. lawmakers privately that it would downgrade the country’s debt if the Treasury Department is forced to prioritize payments because Congress does not raise the debt limit, a congressional aide said on Thursday.
The warning undercuts an argument made by some Republicans that the country’s credit rating would not be affected as long as the Treasury Department made debt service a priority over other obligations.
According to the Wall Street Journal, S&P indicated the nation could face a downgrade “if the government fails to make any of its expected payments – including Social Security checks – even if it makes all its debt payments.” The S&P managing director warned in a private meeting that a downgrade could occur “if the U.S. began skipping payments to other creditors, such as veterans or vendors, which would throw into question its ability to meet its obligations.”
And these warnings are hardly empty threats. In a surprise move yesterday, Moody’s downgraded Ireland’s credit rating to junk.
According to Business Insider, spokeswoman for the European Commission President Manuel Barroso, stated that such a downgrade was incomprehensible:
The Irish government has shown determination and decisiveness in its implementation of the economic adjustment program. Exports are growing strongly and the country is regaining competitiveness. All of this is set to underpin a return to growth this year.
The report was a frustrating blow to Ireland. Despite the Irish government’s commitment to control its budget deficit problem, Moody’s downgraded the country’s rating over concern about Greece’s debt crisis and its impact on the Euro Zone. Moody’s stated that a second bailout may be needed.
Moody’s also noted that further degradation remains a strong possibility:
Moody’s would consider a further rating downgrade if the Irish government is unable to meet the targeted fiscal consolidation goals. A further deterioration in the country’s economic outlook would also exert downward pressure on the rating, as would further market disruption resulting from a disorderly Greek default.
Such a move puzzled and frustrated Prime Minister Enda Kenny, after so much effort was made to control the country’s finances. According to Reuters, “Kenny told Parliament that ‘Moody’s problem is not with Ireland’ but with the way European leaders are handling a Europe-wide crisis.” Kenny called on the EU to solve Europe’s debt crisis, which is having adverse effects on the nations as a whole. An emergency summit will be held Friday.
