(Bloomberg News) Moody's Investors Service put the U.S. under review for a credit rating downgrade as talks to raise the government's $14.3 trillion debt limit stall, adding to concern that political gridlock will lead to a default.
The Aaa ratings of financial institutions directly linked to the U.S. government, including Fannie Mae, Freddie Mac, the Federal Home Loan Banks, and the Federal Farm Credit Banks, were also put on review for cuts, Moody's said in a statement today.
The U.S., rated Aaa since 1917, was put on review for the first time since 1995. Even a temporary default by the U.S. would likely have "large systemic effects" on the economy and Treasury finances by disrupting money funds, the repurchase- agreement market and foreign investor willingness buy the government's debt, JPMorgan Chase & Co. said in a report.
"A U.S. government default is something the markets aren't prepared to deal with," said Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott LLC in Philadelphia. "It's hard to get 535 people to agree on anything, much less something as contentious as trillions of dollars of spending and taxes."
Treasury Secretary Timothy F. Geithner said he has taken steps to prevent a federal default until Aug. 2, using accounting measures that involve two retirement funds. The U.S. reached its borrowing limit on May 16.
President Barack Obama has met with congressional leaders from both parties to negotiate an increase in the nation's debt ceiling. Obama has said he's open to a long-term deal to tackle the country's finances, although he and other Democrats say an agreement must include revenue increases. House Speaker John Boehner of Ohio has said that any plan calling for higher taxes wouldn't pass Congress.
Standard & Poor's put the U.S. government on notice on April 18 that it risks losing its AAA credit rating unless policy makers agree on a plan by 2013 to reduce budget deficits and the national debt. The firm said at the time that there's a one-in-three chance that the rating might be cut within two years and that its "baseline assumption" is that Congress and the Obama administration will come to terms on a plan to reduce record deficits.
S&P would lower its sovereign top-level AAA ranking to D, the last rung on its scale if the U.S. can't pay its payments because of a failure to raise the debt ceiling, John Chambers, chairman of the company's sovereign rating committee, said June 30. Moody's said it would probably assign a position in the Aa range, or within three steps of its highest level.
The U.S. is among 17 countries, from Australia to Canada to Switzerland, rated Aaa by Moody's. S&P gives 18 countries its top ranking.