Debt Ceiling Debate: Moody's Puts U.S. on Review for Downgrade

July 13, 2011 5:18 PM

ABC’s Dan Arnall (@abcmoneyguy) reports:

It has happened. Moody's said it would put the United States on review for downgrade if there is not substantial progress on a debt deal by mid-July. They did just that this afternoon.

"Moody's considers the probability of a default on interest payments to be low but no longer to be de minimis," reads the a press release from the credit rating agency. "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."

Of great interest here – Moody’s says that even if the debt ceiling is raised, the agency will likely downgrade the outlook for U.S. ratings to negative unless a “substantial and credible” deal is struck to put than nation’s future borrowing and spending ways on a more sustainable path.

Financial markets are already reacting to this news even as negotiators in Washington seek a deal behind closed-doors.

Some highlights from the Moody’s release:

• “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.”

The U.S. Treasury Department quickly reacted with its own statement.

“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," said Under Secretary for Domestic Finance Jeffrey A. Goldstein.