U.S. AAA bond rating put under review for possible downgrade, Moody’s says

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The U.S. could lose its Aaa bond rating if the Treasury’s debt ceiling isn’t raised soon, Moody’s Investors Service warned Wednesday.

Moody’s formally put the U.S. rating under review for a possible downgrade, making good on a threat it issued on June 2.

The Wall Street ratings firm cited “the rising possibility that the statutory debt limit will not be raised on a timely basis, leading to a default on U.S. Treasury debt obligations.”

A downgrade from the highest credit grade, even if symbolic, could be devastating for America’s image, particularly with its foreign creditors such as China.

The move comes at a time when fears about a deepening government debt crisis in Europe have spread from relatively small countries such as Greece to the major economies of Spain and Italy.

Moody’s warning follows the latest signs that talks between the White House and Republican leaders on the debt ceiling and spending cuts remain at impasse. The Treasury has set Aug. 2 as the deadline by which Congress must raise the $14.3-trillion debt ceiling or risk the government running out of money to pay some of its bills.

Asked Wednesday what would happen if the United States defaulted on its debt because of the impasse over the budget, House Speaker John Boehner (R-Ohio) called it ‘a crapshoot.’

Later, reacting to Moody’s decision, Boehner said the move ‘underscores the warning I outlined months ago. 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.’

The White House shifted the onus to Congress. “Moody’s assessment is a timely reminder of the need for Congress to move quickly to avoid defaulting on the country’s obligations and agree upon a substantial deficit reduction package,” Treasury Under Secretary for Domestic Finance Jeffrey A. Goldstein said in a statement.

The Treasury has many options in terms of spending cuts before it would have to halt payments to bondholders. Moody’s acknowledged as much, saying it considered ‘the probability of a default on interest payments to be low but no longer to be de minimis.’

The firm said that ‘an actual default, regardless of duration, would fundamentally alter Moody’s assessment of the timeliness of future payments, and a Aaa rating would likely no longer be appropriate. However, because this type of default is expected to be short-lived, and the expected loss to holders of Treasury bonds would be minimal or non-existent, the rating would most likely be downgraded to somewhere in the Aa range.’

President Obama has warned that Social Security payments could be halted if the debt ceiling isn’t raised by the deadline.

Based on cash flow projections, the government will have enough to cover only slightly more than 55% of its bills in August without additional borrowing.

Moody’s announcement came after U.S. markets closed. The Treasury had no trouble earlier in the day selling $21 billion of new 10-year notes at an annualized yield of 2.92%.

Treasury bond rates have declined in recent days, showing no sign that investors are fearful that the government might default.

The U.S. holds the top AAA debt rating from all three major ratings firms -- Moody’s (which uses the style Aaa), Standard & Poor’s and Fitch Ratings. Other countries with the highest rating include Germany, France, Switzerland, Britain, Canada and Australia. The U.S. has had Moody’s top credit grade since 1917.

Moody’s recently has been the most aggressive of the three firms in downgrading debt of Europe’s fiscally struggling governments. The firm cut Ireland’s debt rating to ‘junk’ status this week, meaning non-investment grade. Portugal was cut to junk last week.

-- Tom Petruno

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