Moody’s Investors Service says the U.S. risks losing its top AAA credit rating if it defaults on its debts–even for a short period of time. The service states Congress needs to find a way to raise the nation’s debt limit soon to stop the worst from happening.
Missed Debt Payment Could Mean Fundamental Rating Change
In an interview with Bloomberg News on June 21, Moody’s senior credit officer, Steven Hess, explained that a missed debt payment could result in a fundamental change in the U.S. credit rating.
He said, “Up until now, our assumption was that the risk is virtually zero of them ever missing an interest payment.” But now that lawmakers seem to be having problems coming to a consensus on how to avoid default after the $14.3 trillion debt ceiling was reached in May, Moody’s fears that missing payments is a real possibility.
Hess went on to explain, “If they actually miss a debt payment, then it’s a fundamental change,” meaning that a downgrade is not only possible, but probable.
Moody’s warned lawmakers on June 2 that it would put the credit rating under review for a downgrade unless there was progress on increasing the debt limit by the middle of July.
Why the Credit Rating Could Drop with Short-Term Default
It may seem harsh that the U.S. could lose its AAA credit rating with even a short-term default, but Moody’s explained that the occurrence would represent more than the default itself.
The service would have to look at the reason for the default, which in this case is a political standoff that won’t allow for the appropriate debt limit increase. Hess told Bloomberg that this is a risk that “is perhaps not compatible with AAA.”
In April 2011, Standard & Poor’s expressed a similar sentiment when it noted that the outlook on America’s AAA debt rating had dropped from stable to negative. This was before the national debt actually reached its limit.
Now, traders are responding by demanding higher prices to insure Treasuries against default, assuming that the standoff between lawmakers could result in the worst-case scenario.
