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Even though time is running out to get a debt ceiling deal through Congress, one of the key players that will decide the fate of America’s credit rating is convinced disaster will be averted.
“We absolutely don’t think there will be a scenario where we cross the X-date and interest payments will be missed,” William Foster, senior vice president and senior credit officer at Moody’s Investors Service, told CNN. “If we did, we would obviously have to change our view on the rating.”
Just eight days remain before the government could run out of cash (the so-called X-date), but Foster said Moody’s is “confident” the federal government will not suffer a first-ever default.
“If we were less confident, we would change our outlook to negative,” Foster said.
The coming days and weeks could test that confidence.
House Republicans and the White House are, so far, struggling to find a compromise on how to raise the debt ceiling. Cash levels at the US Treasury are dwindling and the accounting gimmicks officials are using to avoid default won’t last much longer.
Wall Street is even starting to wake up to the debt ceiling dangers ahead, with the stock market finally buckling a bit following days of calm.
‘There has never been a default’
Even if a default is avoided, there is a risk that America’s ability to borrow cheaply – a key strength of the US economy – will be diminished if Moody’s or another credit ratings firm downgrades the country’s credit rating. During the 2011 fight over the debt ceiling, S&P removed its perfect credit rating from the United States.
Asked why he is confident the United States won’t default, Foster pointed to historical precedent, adding, “There has never been a default.”
The Moody’s executive also reassuring comments from Republican and Democrat leaders alike about the importance of America paying its bills.
“The message is clear: Neither side intends to default,” Foster said. “We’re expecting the noise to be pretty loud but fundamentally the outcome to be the same.”
Asked if Republicans should be blamed if the United States defaults, House Speaker Kevin McCarthy questioned the premise. “First of all, I don’t think there will be a default,” McCarthy told reporters on Wednesday.
Delaying payments won’t be deemed a default
However, given the tight timetable between now and the June 1 deadline set by the Treasury Department, Moody’s isn’t ruling out the idea that the federal government could be forced to delay payments on other items beyond payments to bondholders.
“If you get past the X-date and Treasury can no longer pay all of its obligations, Treasury will need to prioritize payments in some way. Certain payments would be missed and others paid first,” Foster said.
Yet Foster made clear that delayed payments on things like Social Security checks or government salaries would not be considered by the credit ratings firm a default.
“Our definition of default is missed interest or payments on principal. If any other payment is missed, that is not a default by our definition,” said Foster.
Thankfully, there is a bit of time before the next interest payment is due on US debt on June 15.
The red line
Still, delayed payments to Social Security recipients or government employees and contractors would cause real economic pain and create vast uncertainty for families, business leaders and investors.
“We’ve never been there before. The X-date has never been crossed,” said Foster.
Treasury deciding to prioritize payments to bondholders would mean the United States is “one step closer to potential default,” Foster said.
If there’s no deal by the X-date, Foster indicated the most likely outcome is that Moody’s would lower its outlook on the United States from stable to negative but stop short of an actual downgrade.
Foster said he can’t definitively say how the process would play out because it would be decided by a committee of experts from around the world who would evaluate the situation. Changing the outlook would “certainly be under consideration,” he said, adding that there would be a discussion of a downgrade.
The red line is missing an interest payment.
In that situation, Foster said, Moody’s would “absolutely downgrade” America’s credit rating.
Source:CNN
