Moodys: The Debt Limit Will Not Cause U.S. Debt Default

The following is directly from July 2011 from Moody's while President Obama and the left were crying that the U.S. would default if the debt limit was not raised. This argument was never true, either in part or in spirit.  The U.S. debt service is about 6% of the budget and even without additional debt, taxes pay for about 69% of government expenditures. (bold and underline ours)

RATIONALE FOR REVIEW

The review of the US government's bond rating is prompted by the possibility that the debt limit will not be raised in time to prevent a missed payment of interest or principal on outstanding bonds and notes. As such, there is a small but rising risk of a short-lived default.

Moody's considers the probability of a default on interest payments to be low but no longer to be de minimis. 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.

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While the debt limit has been raised numerous times in the past, and sometimes the issue has been contentious, bond interest and principal have always been paid on time. If the debt limit is raised again and a default avoided, the Aaa rating would likely be confirmed. However, the outlook assigned at that time to the government bond rating would very likely be changed to negative at the conclusion of the review unless substantial and credible agreement is achieved on a budget that includes long-term deficit reduction. To retain a stable outlook, such an agreement should include a deficit trajectory that leads to stabilization and then decline in the ratios of federal government debt to GDP and debt to revenue beginning within the next few years.

Of course, President Obama refuses any meaningful action to control spending and has continued to increase the ratio of federal government debt to GDP. Consequently, the U.S. debt rating was changed to Aaa with a negative outlook.  The left-wing media then attempted to portray that the downgrade was due to the debt limit fight and pointed to Moody's to make their false argument. They lied.

The worst offender to the truth was HBO's "The Newsroom." This blog helped expose the insane accusation that American conservatives are the "American Taliban" per this show. Click the link above for more information.

Additonal Moody's reviews can be found here.

The current Moody's  review is available to registered Moody's users here. If you do not have access we have provided a pdf here and as an enclosure. In this review from December 2012, Moody's outlines their expectations for a U.S. Government default. (bold and underline ours)

If the extraordinary measures are exhausted, the federal government will only be authorized to spend an amount equal to incoming revenues.  During the last fiscal year, revenues were equivalent to 69% of expenditures.  If this ratio were the same in the current fiscal year, government spending would have to be reduced by 31%.  Which expenditures, including interest payments, would be cut would be decided by the administration, which has not said in the past how it would prioritize its obligations.

Moody’s believes it is likely that interest payments on bonds and notes held by the public, which accounted for about 6% of total federal expenditures in the last fiscal year, would receive high priority under such a scenario.  While this is by no means certain, action to increase the statutory debt limit is highly likely.  Even if Congress does not raise the limit before January 1, we would expect them to act before the Treasury exhausts the variety of measures as they have done many times in the past.  A history of the statutory debt limit is discussed at length in our February 2011 special comment.

Eventual action to increase the debt limit is highly likely. Our baseline assumption is that Congress will raise the limit prior to severe expenditure cuts being necessary. This expectation is based on the long history of debt limit increases, the vast majority of which have occurred before the limit is actually reached. Some increases in the limit have been contentious and this is particularly likely to occur when one political party has a majority in the House of Representatives and the other occupies the White House, as is currently the case. While we may consider a review for downgrade, such a rating action may not become necessary, even if action to raise the debt limit is delayed for a period of time because the risk of default will likely remain extremely low. As a general practice, we place ratings under review when the probability of a rating change is substantial, such as 25% or more. Considering the history of the debt limit and the speed with which compromises can be reached, we believe it is still unlikely that this condition will be reached during the political negotiating process.  We see a high probability that there will be a political compromise, even if it has a last minute nature.

As we said in October, the direction of the US government bond rating will most likely be determined by the outcome of budget negotiations that are ongoing and may well extend into 2013. In particular, if budget negotiations lead to specific policies that produce a stabilization and then downward trend in the ratio of federal debt to GDP over the medium term, the rating will likely be affirmed and the outlook returned to stable.  If those negotiations fail to produce a plan that includes such policies, we would expect to lower the rating, probably to Aa1.  

The next time that you are told to believe that the debt limit DEBATE is the cause of the U.S. credit downgrades, smell the Democrat Doo Doo Economics being flung upon you.