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NEWS ALERT: MOODY’S PUTS USA ON DOWNGRADE WATCH


Moody’s Investors Service put the U.S. under review for a credit rating downgrade as talks to raise the government’s $14.3 trillion debt limit stall, adding to concern that political gridlock will lead to a default.

The Aaa ratings of financial institutions directly linked to the U.S. government, including Fannie Mae, Freddie Mac, the Federal Home Loan Banks, and the Federal Farm Credit Banks, were also put on review for cuts, Moody’s said in a statement today.

The U.S., rated Aaa since 1917, was put on review for the first time since 1995 on concern the debt limit will not be raised in time to prevent a missed payment of interest or principal on outstanding bonds and notes even though the risk remains low, Moody’s said. The rating would likely be reduced to the Aa range and there is no assurance that Moody’s would return its top rating even if a default is quickly cured.

“It certainly underscores the importance of passing the debt ceiling and not putting us in default status, and making sure there’s a longer term fiscal plan to contain spending and the deficit we’ve been running up over the last few years,” said Anthony Cronin, a Treasury bond trader at Societe General SA in New York, one of the 20 primary dealers that trade with the Federal Reserve. “Maybe it’s the impetus to say we’ll need more of a concession.”

Dollar, Bonds

The dollar weakened and Treasuries were little changed after the Moody’s statement. IntercontinentalExchange Inc.’s Dollar Index, which tracks the greenback against the currencies of six U.S. trading partners, including the euro, yen and pound, slid for a second day, shedding 1.1 percent.

The 10-year note yield was little changed at 2.88 percent at 5:31 p.m. in New York, according to Bloomberg Bond Trader prices, after increasing earlier as much as eight basis points to 2.96 percent. The yield dropped to 2.81 percent yesterday, the lowest since Dec. 1. The price of the 3.125 percent security due in May 2021 declined 1/32, or 31 cents per $1,000 face amount, to 102 2/32.

Treasury Secretary Timothy F. Geithner said he has taken steps to prevent a federal default until Aug. 2, using accounting measures that involve two retirement funds. The U.S. reached its borrowing limit on May 16.

The Moody’s announcement is a “timely reminder” and that Congress must “move quickly” to avoid default, the Treasury said in a statement today.

Debt Talks

“What we’re looking for is a raising of the limit. It doesn’t matter the process that they get there,” Steven Hess, the senior credit officer at Moody’s in New York, said in a telephone interview. “The rating outlook will be determined by the longer-term debt trajectory.”

Senate Republican Leader Mitch McConnell proposed a “last choice option” yesterday that effectively would grant President Barack Obama power to raise the debt limit in installments. McConnell’s plan would let the president raise the limit in three stages unless Congress disapproves by a two-thirds majority, while Obama would also be required to propose offsetting spending cuts. The spending reductions would be advisory, and the debt-ceiling increase would occur regardless of whether lawmakers enact the cuts.

“I think it reflects what we all know — that this is a serious time and serious discussions and we can’t continue to have people not contribute to solving this problem,” said Senator Patty Murray of Washington, the No. 4 Democratic leader in the chamber.

Boehner Reaction

“As Speaker Boehner has warned for months, if the White House does not take action soon to address our nation’s debt crisis by reining in spending, the markets may do it for us,” said Michael Steel, spokesman for House Speaker John Boehner, Republican of Ohio. “This action by Moody’s today reinforces the Speaker’s warning.”

Standard & Poor’s put the U.S. government on notice on April 18 that it risks losing its AAA credit rating unless policy makers agree on a plan by 2013 to reduce budget deficits and the national debt. The firm said at the time that there’s a one-in-three chance that the rating might be cut within two years and that its “baseline assumption” is that Congress and the Obama administration will come to terms on a plan to reduce record deficits.

S&P would lower its sovereign top-level AAA ranking to D, the last rung on its scale if the U.S. can’t pay its payments because of a failure to raise the debt ceiling, John Chambers, chairman of the company’s sovereign rating committee, said June 30. Moody’s said it would probably assign a position in the Aa range, or within three steps of its highest level.

The U.S. is among 17 countries, from Australia to Canada to Switzerland, rated Aaa by Moody’s. S&P gives 18 countries its top ranking.

To contact the reporter on this story: John Detrixhe in New York at jdetrixhe1@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net

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