The bond-rating service Moody’s has threatened to dim its outlook for U.S. Treasury bonds if the debt-limit showdown between the White House and Congressional Republicans drags on.
Although Moody’s fully expected political wrangling prior to an increase in the statutory debt limit, the degree of entrenchment into conflicting positions has exceeded expectations. The heightened polarization over the debt limit has increased the odds of a short-lived default. If this situation remains unchanged in coming weeks, Moody’s will place the rating under review.
That makes two out of three influential rating agencies to call for significant action on the debt before the next election. In April, Standard & Poor’s lowered its long-term outlook on U.S. debt from “stable” to “negative.” (Fitch Ratings remains on the sidelines so far.) The S & P action was greeted with scorn in some circles and no doubt the Moody’s announcement will trigger some of the same feelings. And with some reason—after all, these same services saw nothing but blue skies ahead for the disastrous mortgage-backed securities being peddled a few years ago. Suddenly they’re worried about what has long been considered the most secure investment on Earth?
But given the grim economic data out this week, hopes must be fading in Washington that the tide of red ink in the federal budget will start dropping by itself. The warnings from the rating services — imperfect as they are — are a sign of the rising pressure for credible action on the long-term debt picture now, not after the next election.