U.S. Faces First Downgrade on Debt, Slowdown: Moody’s - Bloomberg

Moody’s Investors Service said the U.S. credit rating may be downgraded for the first time on concern that fiscal discipline may ease, further debt reduction measures won’t be adopted and the economy may weaken.

The U.S., rated Aaa since 1917, was placed on negative outlook, New York-based Moody’s said in a statement today as it confirmed the rating. Moody’s warned on July 29 a negative outlook was “more likely” as lawmakers reduced the size of spending cuts being negotiated to win approval on a plan to lift the nation’s borrowing limit.

A ratings cut would raise the specter that the wrangling between President Barack Obama and Republican lawmakers over spending cuts and taxes will harm American prestige and the global financial system. JPMorgan Chase & Co. estimated that a downgrade would raise the nation’s borrowing costs by $100 billion a year. It could also hurt the rest of the U.S. economy by increasing the cost of mortgages, auto loans and other types of lending tied to the interest rates paid on Treasuries.

“A downgrade is a sign that Congress is failing to address a real fiscal issue,” Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott LLC in Philadelphia, said in an interview before the announcement.

Moody’s Investors Service put the U.S. under review for a downgrade on July 13 for the first time since 1996.

Standard & Poor’s put the U.S. government on notice on April 18 that it risks losing its AAA rating unless lawmakers agree on a plan by 2013 to reduce budget deficits and the national debt. Fitch Ratings said today the U.S. is under a review as the nation’s debt burden increases at a pace that isn’t consistent with an AAA sovereign credit rating.
Debt Deal

An increase in Treasury yields of 50 basis points would reduce U.S. economic growth by about 0.4 percentage points, JPMorgan said in a report, citing Federal Reserve research and data.

Obama signed the debt-limit compromise on the day the Treasury had warned the nation’s borrowing authority would expire, ending a months-long debate that reinforced partisan divisions over federal spending.

The Senate voted 74-26 for the measure, which raises the nation’s debt ceiling until 2013 and threatens automatic spending cuts to enforce $2.4 trillion in spending reductions over the next 10 years. The House passed the plan Aug. 1.

S&P had indicated that anything less than $4 trillion in cuts would jeopardize the U.S.’s AAA rating.
‘Grand Bargain’

“A grand bargain of that nature would signal the seriousness of policy makers to address the fiscal situation in the U.S.,” John Chambers, chairman of S&P’s sovereign rating committee, said in a video interview distributed by the New York-based ratings firm on July 28.

Still, U.S. bonds and the dollar have signaled increased demand for the assets of the world’s largest economy even as the prospects of losing the AAA rating rose as the debt talks extended to the deadline when the Treasury said it would exhaust its ability to borrow.

Treasury yields average about 0.70 percentage point less than the rest of the world’s sovereign debt markets, Bank of America Merrill Lynch indexes show. The difference has expanded from 0.15 percentage point in January.

Investors from China to the U.K. are lending money to the U.S. government for a decade at the lowest rates of the year. For many of them, there are few alternatives outside the U.S., no matter what its credit rating.
‘Safe Haven’

Ten-year Treasury yields fell to as low as 2.60 percent on today in New York, the least since November. The dollar represents 60.7 percent of the world’s currency reserves, compared with the 26.6 percent for the euro, which has the next biggest portion, according to the International Monetary Fund in Washington.

“Regardless of the rating, Treasuries are going to be seen as the safe haven,” said Matthew Freund, a senior vice president at USAA Investment Management Co. in San Antonio, where he helps oversee about $50 billion in mutual fund assets. “The U.S. remains one of the strongest, most dynamic economies in the world.”