A bit of ground-softening here as Moody’s plays catchup to S&P (emphasis ours):
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.
FT Alphaville is not a shaman, but it’s unlikely that much progress on the debt ceiling will be made “in coming weeks.” So if Moody’s true to its word, then the US will soon be under review.
But something about this is quite silly — not that Moody’s would consider putting the Aaa rating under review, but rather the peculiar reason it gives for this announcement. A continued statemate in the next few weeks actually would have little bearing on whether the debt ceiling is ultimately raised (and although we never say never, we’re still confident that it will be).
It’s been expected for some time that the negotiations will go on until we’re very close to the Geithner-estimated deadline of August 2nd. That doesn’t mean there can’t be a bond market freakout or another potentially destabilising consequence if Washington pushes things too close to the edge. It’s just that this is how these things are normally negotiated, so we weren’t expecting anything to happen soon. And therefore we find it strange that Moody’s is making the events of the next few weeks a condition of whether it takes action.
Here, we’ll let Aaron Sorkin explain:
Related link:
S&P goes negative on the United States of AAA/A-1+merica – FT Alphaville
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