Moody's Downgrade Threat

All hail the almighty credit rating agency. Yesterday Moody's threatened to downgrade the United States:

Moody's Investors Service has placed the Aaa bond rating of the government of the United States on review for possible downgrade given the rising possibility that the statutory debt limit will not be raised on a timely basis, leading to a default on US Treasury debt obligations. On June 2, Moody's had announced that a rating review would be likely in mid July unless there was meaningful progress in negotiations to raise the debt limit.

In conjunction with this action, Moody's has placed on review for possible downgrade the Aaa ratings of financial institutions directly linked to the US government: Fannie Mae, Freddie Mac, the Federal Home Loan Banks, and the Federal Farm Credit Banks. We have also placed on review for possible downgrade securities either guaranteed by, backed by collateral securities issued by, or otherwise directly linked to the US government or the affected financial institutions.

The Wall Street Journal points out:

For the dollar, this would spell disaster.

The triple-A rating on U.S. government bonds is one of the main reasons why many investors, including other major central banks, hold these dollar assets.

Take this top-level rating away and many will be forced to sell. The diversification flows into other major currencies, which have been a major source of dollar weakness in recent years, will only accelerate.

This crack in the dollar’s foundations comes just as confidence in the U.S. currency was starting to rise again. The growing debt crisis in the euro zone, the threat of currency intervention by Japan and hopes that the U.S. economic recovery is finally gaining traction had helped to boost interest in the U.S. currency.

Yet the markets today are fairly calm. The reason? Most institutional analysts don't believe an actual downgrade and a default will happen. This is good news in some regards because Moody's, a credit rating agency, is trying to tell the United States they must enact austerity in so many words, or be given a negative outlook, long term.

While the debt limit has been raised numerous times in the past, and sometimes the issue has been contentious, bond interest and principal have always been paid on time. If the debt limit is raised again and a default avoided, the Aaa rating would likely be confirmed. However, the outlook assigned at that time to the government bond rating would very likely be changed to negative at the conclusion of the review unless substantial and credible agreement is achieved on a budget that includes long-term deficit reduction. To retain a stable outlook, such an agreement should include a deficit trajectory that leads to stabilization and then decline in the ratios of federal government debt to GDP and debt to revenue beginning within the next few years.

Maybe in the past Congress at the last hour raised the debt ceiling, but this time Congress is loaded with bat-shit crazies. Not only do they refuse any revenues, but these cats are out to destroy Medicare and Social Security. Not a good time to try to reduce the deficit considering Congress is front loaded with crazy people who despise the U.S. middle class, working America and are out to destroy their benefits at all costs.

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