Moody’s warns of spillover if US downgraded

US President Barack Obama leaves a press conference in the East Room of the White House © AFP Saul Loeb

AFP

WASHINGTON – Moody’s said Wednesday that the ratings of US government-related firms, municipal bond issuers and even private firms could be hit if the Washington defaults on debt payments in August.

The agency reiterated that if the country’s $14.29 trillion debt ceiling is not raised by August 2, the government could default on debt payments and would see its top grade Aaa debt rating erode, either with a negative warning or an outright downgrade.

It said that, in that case, government-controlled debt issuers like mortgage backers Fannie Mae and Freddie Mac would see their ratings equally downgraded.

Feeling the same heat would be municipal debt issuers who use government-linked securities as collateral, Moody’s said.

But Moody’s added that debt issuers even with no federal government links, private or otherwise, could also see their ratings slide if the US was downgraded, because that could hurt the overall economy, the banking system and the dollar.

“Aaa-rated states and local governments, however, are more likely to be vulnerable to credit pressure under these circumstances than Aaa-rated corporates” or Aaa-rated structured securities, it said.

Moody’s raised the issue as the White House and Congress remained deadlocked over increasing the country’s debt ceiling.

The government has said that if the ceiling is not raised by August 2, it would be forced to hold back debt payments and/or slash spending.

Both would damage the economy, but a debt default would see the US rating attached with a warning if not a direct downgrade, Moody’s said — pushing up the government’s borrowing costs.

If a default does happen, Moody’s expects that the problem would be fixed quickly by a political deal for a ceiling hike and US debt holders would be fairly paid, or “made whole.”

Nevertheless, Moody’s said it would be weighing variables in the case:

– how fast the default is cured

– the impact of the default on long-term US borrowing costs

– what is done to prevent it from happening again

– and how the government’s eventual plans for deficit and debt reduction would affect the economy.

However, Moody’s said strong private firms with top ratings and little link to government finances would not likely be affected.

“As is the case in other countries, it is possible for issuers with strong credit profiles to be rated more highly than the government, up to the level of the country ceilings,” it said.

© AFP — Published at Activist Post with license