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Posts Tagged ‘Moody’s’

Debt Ceiling Extension – Short or Long-Term

One of the issues in the debt ceiling debate is the size of the increase in borrowing capacity, which effectively determines how long before the government runs out of money again.  President Obama and some Congressional leaders have demanded any debt ceiling increase cover the projected federal deficit for at least 18 months, thereby deferring the next debt ceiling vote until after the November 2012 election.

Congress has passed and the President has signed three debt ceiling measures over the past 2 ½ years. Here is the  history of the debt ceiling votes since President Obama took office in January 2009.

  • February 2009 – debt ceiling increased to $12.1 trillion, lasting 10 months
  • December 2009 – debt ceiling increased to $12.4 trillion, lasting 2 months
  • February 2010 – debt ceiling increased to $14.3 trillion, lasting 15 months

President Obama’s current insistence for a limit to last 18 months is longer than any of the three extension bills he previously signed.  Given the acrimonious nature of the current debate and political wrangling, it’s understandable why he prefers to push any future debate beyond the 2012 election.   However, a political preference to avoid a contentious issue does not justify vetoing legislation with a shorter time frame.

Many Republicans are willing to pass a shorter-term measure because they believe the political sentiment on this issue is in their favor.  In all fairness, if they believed a short-term measure was detrimental to their political future, they would be pushing for a longer term solution as well.

The supporters of the 18-month measure have argued a short-term increase will continue to negatively impact the economy and jeopardize the U.S. Government’s credit rating.  However, neither Moody’s nor Standard & Poor’s have indicated the size of debt increase as a significant factor in assessing the credit rating of U.S. Treasury securities.  Both have stated there are two primary factors they are considering; 1) the U.S. not defaulting on any of its payments and 2) a meaningful reduction in future budget deficits.  The length of a new debt ceiling has not been mentioned as having any bearing on their assessment.

The markets seem to echo this sentiment.  We’re days away from the August 2nd default date, yet there has been no appreciable change in the trading or pricing of U.S. Treasuries.
It appears traders and investors assume Congress will pass some measure to prevent the government from defaulting, even if it’s short term.  Although investors prefer Congress to act sooner, they understand the political landscape and realize such issues often result in deals being cut at the last moment, or Congress passes a short-term extension to grant themselves more time to reach a deal.

The 2011 Budget is a good example.   Rather than shutting down the government for failing to reach an agreement, Congress passed six continuing resolutions to fund the government from October 1, 2010 through April 8, 2011, before the final budget deal was reached.  The shortest continuing resolution was 3 days, keeping the government operating from December 18 – 21, 2010.  Although it may be annoying and unnecessary, short-term extensions to keep the government operating have become rather common.

At this point, I think a short-term resolution is probably the most likely bill to pass.  As much as the President may want an 18-month limit and some conservatives want no increase in the debt ceiling, neither one of them wants to be the blame for the U.S. government defaulting and the potential economic chaos which could result.  Political winds can shift rather quickly, and no one wants to be caught downwind of decision which freezes the markets or dramatically increases interest rates.

If you have read any of my prior articles, you know I strongly believe dramatic long-term changes to our fiscal policies are necessary. At the same time, significant changes in policies or spending should not be hastily passed, and I would much prefer good legislation over expediency.

Everyone may be tired of the debate and just want it to be over, but don’t allow politicians to obscure what they’re doing by waiting until the last minute to present and pass something.   Spending cuts and tax increases affect real people.  Tough choices need to be made… that’s a given.  Let’s just make sure we all have time to understand the choices being made by our elected officials; before they are enacted.

U.S. Credit Rating at Risk

If you’re concerned about the long-term ramifications of the growing federal debt, you’re not alone.   Two major credit ratings agencies, Moody’s Investors Services (Moody’s) and Standard & Poor’s (S&P), issued a warning to investors about the possible future downgrade in the credit rating of the U.S. Government.

 Moody’s report issued this week stated that the U.S. Government “must reverse the expansion if its debt if it hopes to keep its ‘Aaa’ rating.”  Separately, the head of S&P France said that “the firm could not rule out lowering the outlook for the U.S. rating in the future.”

A downgrade in the rating is not imminent, but these statements can be seen as a warning signal to investors. 

Credit rating agencies are supposed to provide an independent and objective opinion of the creditworthiness of publically-traded debts.  The credit rating impacts the interest rate and the value of the bonds when they are traded on the secondary market.

The following are a few of the factors contributing to the forewarnings by Moody’s and S&P.

  • The rapid and continued growth in the federal debt over the past 4 years
  • Rumblings in Congress over the reluctance to increase the debt ceiling
  • Sovereign debt issues roiling Western European countries and the Eurozone
  • The recent backlash to Moody’s and S&P for giving high credit ratings to mortgage-backed securities that turned out to be the equivalent of junk-bonds

Moody’s and S&P may have their own selfish motivations for these advanced warnings, but it’s a message to be heeded.  There were early warning signs that the housing market was in trouble, but most people brushed them aside.  Likewise, there are warning signs that the size and growth of the federal debt poses serious financial threat to us that you should not ignore.  The recent comments by Moody’s and S&P are one of those signs.

So… what does this mean to you? Probably not much at the moment.  However, the long-term consequence may be significant.

A downgrade in the credit rating of U.S. Treasury securities would likely cause an increase in the interest rate on future debt issues. Increasing interest payments will further exacerbate the current budget crisis.  Since more money is required to pay interest on the debt, less money is available for other spending, thereby further increasing the deficit or causing larger spending cuts.

A downgrade in the credit rating would also impact what it costs you to borrow money.  Virtually every loan in the U.S. in directly or indirectly tied to Treasury rates.  Be it credit cards, auto loans, home mortgages or business loans, you can expect the cost of borrowing to increase for any type of credit you obtain.

Moody’s and S&P may have intended their statements to be a “heads-up” to investors, but the audience is much larger.  Hopefully it’s a message our political leaders will heed regarding our current fiscal situation.  It’s also a message to you as an individual.  You may not be able to control what happens in Washington, but beware and be prepared.  A future downgrade in the U.S. credit rating may be coming, and if it happens, it’s going to cost you.