Moody’s Puts U.S. Credit Rating On Review For Possible Downgrade
And so it begins, the first of the big credit rating agencies is sending a message that they’ve pretty much had it with the game playing in Washington:
The United States may lose its top-notch credit rating in the next few weeks if lawmakers fail to increase the country’s debt ceiling, forcing the government to miss debt payments, Moody’s Investors Service warned on Wednesday.
In a statement, Moody’s said it sees a “rising possibility that the statutory debt limit will not be raised on a timely basis, leading to a default on U.S. Treasury debt obligations.”
Moody’s isn’t kidding around. Just today, they downgraded Ireland’s bonds to junk status over ongoing fiscal insolvency. Will this finally be what gets the adults in Washington to do what needs to be done? One can only hope.
Update: And, of course, the markets are reacting as expected:
Stock futures and the dollar fell late Wednesday after Moody’s Investors Service warned the United States may lose its prized AAA credit rating, reversing a rally on Wall Street.
The credit ratings agency cited the growing risk that Washington could fail to raise its $14.3 trillion government debt limit “on a timely basis.
Government debt prices also fell. Benchmark 10-year Treasury notes slid 8/32 in price to yield 2.91 percent, while the dollar tumbled against most major currencies and set another record low against the Swiss franc as Thursday’s Asian trading session opened.
The dollar fell as low as 0.8140 Swiss franc on electronic trading platform EBS. S&P 500 futures initially lost about 11 points on the news to about 1,302 before recovering a bit to 1,306, down 5.10 points from Wednesday’s close.
“They’ve been threatening to do it for the last 60 days,” said Cliff Draughn, president and chief investment officer at Excelsia Investment Advisors in Savannah, Georgia. “What has been beginning to spook Moody’s and some other people is that Congress may be dumb enough to actually default on the debt.”
Investors have not fully appreciated the seriousness of a potential credit downgrade, as most have expected an agreement to be reached in Washington, said Troy Buckner, managing principal at NuWave Investment Management in Parsippany, New Jersey.
“This would likely be a game-changer over the very short run and could cause large market dislocations very quickly,” Buckner said.
I’m no expert on market psychology, and don’t claim to be, but this news, combined with the reports coming out of Wednesday’s White House meeting sound like just the kind of thing that might get traders starting to worry that their assumption that Washington couldn’t possibly be stupid enough to fail to act in this situation to rethink their position.