Moody's Sees 'Small but Rising Risk' of U.S. Short-term Debt Default

Noting that "if there is no progress on increasing the statutory debt limit in coming weeks," Moody's Investors Service "expects to place the U.S. government's rating under review for possible downgrade due to the very small but rising risk of a short-lived default." The investors service rang the warning bell on Thursday, as legislators in Washington and elsewhere stood in fiscal gridlock. The U.S. government has been said to be at risk for short-term default on August 2, according to Treasury Secretary Tim Geithner. The language was especially biting from the investors service, which challenged the U.S. government's pristine credit rating. "Although Moody's fully expected political wrangling prior to an increase in the statutory debt limit, the degree of entrenchment into conflicting positions has exceeded expectations. The heightened polarization over the debt limit has increased the odds of a short-lived default. If this situation remains unchanged in coming weeks, Moody's will place the rating under review." Further, "Failure to reach an agreement as part of the current negotiations would increase the likelihood of a negative outlook in the near term, because the upward debt trajectory would still be in place. At present, this appears the most likely outcome, in Moody's opinion." The U.S. government's strong credit rating has undoubtedly allowed the country to borrow beyond its means. A ratings downgrade, however, would make borrowing from others more expensive. Geithner told reporters that things could be worked out. "I am confident that two things are going to happen this summer. One is that we are going to avoid a default crisis and we are going to reach agreement on a long-term fiscal plan." Moody's comments that "If default is avoided, the Aaa rating would likely be affirmed after any review."