Most major rating agencies are maintaining their top ratings on US Treasury securities despite warnings that Congress’ failure to raise the federal debt ceiling could lead to a default. Credit ratings are meant to measure the likelihood of default, that is, failure to pay promised principal and interest on time and in full. But even after the debt ceiling expired on July 31 and the Treasury Secretary Janet YellenJanet YellenDemocrats urge IRS to address backlogs and improve customer service during filing season Time to use Patriot Act against Putin’s Russian elite warned Congress that a default would have “absolutely catastrophic economic consequences”, the rating agencies did not adjust their ratings.
With the House in recess until later this month, the issue of the debt ceiling looks unlikely to be addressed until at least September. For now, the Treasury Department will be forced to continue taking “extraordinary measures” to pay government bills without issuing new public debt. The Congressional Budget Office expects these measures to work until October or November, when the federal government would “delay payments for its activities, default on its debts, or both.”
Congress has extended or suspended the debt ceiling several times over the past decade. Republicans have raised the debt ceiling three times under the Trump administration, adding more than $7 trillion in debt over four years. During the Obama administration, however, Republicans have consistently opposed raising the debt ceiling, which has contributed to Standard & Poor’s (S&P) citing “tightrope politics” as the one of the reasons he downgraded the nation’s credit rating in 2011.
Now, as Republicans again want to portray themselves as being against the accumulation of debt, the Senate Republican leader Mitch McConnellAddison (Mitch) Mitchell McConnellOn the money – Congress plans to sprint to avoid closing congressional races to seal government funding deal Republicans scramble to stop Greitens in Missouri MORE (R-Ky.) said Democrats “won’t get our help” to raise the debt ceiling.
Democrats could raise the debt ceiling without Republican support as part of their reconciliation package — if they can stick together on the package. Many political observers were surprised that the debt ceiling was not included as part of the original reconciliation bill, which Senate Democrats passed.
Another method of raising the debt ceiling would be to include the wording of the debt ceiling in a permanent resolution. If passed by September 30, a CR with a debt ceiling provision would avoid both a federal government shutdown and a default. But under current Senate rules, such a move could be filibustered and would therefore require Republican support.
Although a debt ceiling default is unlikely, it is not unimaginable. Most rating agencies have over 20 ratings, most of which are in varying degrees of “unlikely” to account for various risks. A chart published in a 2003 Moody’s methodological paper associates its highest rating, Aaa, with a one-year probability of default of 0.0001%, meaning a one-in-a-million chance of default within a year. The next highest rating, Aa1, implies a probability of default of six in a million, and the third highest rating, Aa2, equates to a probability of default of 14 in a million.
To me, a probability of six or 14 in a million seems more appropriate for the current debt ceiling situation than one in a million. Yet Moody’s, Fitch, DBRS and Kroll continue to apply their highest rating to US Treasury securities, with only Standard and Poor’s applying a slightly lower AA+ rating among nationally recognized statistical rating organizations.
Beyond the current risk, a US Aaa/AAA rating seems incongruous with the fundamentals of the country’s government. Of the dozen countries rated Aaa by Moody’s, the United States has the highest net public debt-to-GDP ratio, which, as reported by the International Monetary Fund, includes debt securities from all levels of government from one country and deducts holdings of financial assets. , like gold.
For 2021, the IMF estimates that the United States has a net public debt-to-GDP ratio of 109%, more than double that of Germany, at 52%, which is the second most indebted country with an Aaa rating. . The US ratio is also much higher than the estimated Aa1-rated Austria net public debt-to-GDP ratio of 64% for 2021 and Finland’s ratio of 33%. Some countries with even lower Aa2 or Aa3 ratings – such as South Korea and the UK – also have better net government debt-to-GDP ratios than the US.
Over the past year, Moody’s Analytics has repeatedly expressed support for Biden’s policies that could increase the national debt. Prior to the election in September 2020, Moody’s Analytics projected that real GDP would grow 7.7% in 2022 if Democrats took control of Congress and implemented Biden’s campaign policies or just 3.8% if donald trumpDonald TrumpOn the Money – Congress Plans to Sprint to Avoid Shutdown Hillicon Valley – Trump-Backed App Goes Online Defense and National Security Overnight – Putin Recognizes Independence of Rebellious Regions MORE and the Republicans retained control. So-Sen. Kamala HarrisKamala HarrisBlack women’s groups rally to defend and celebrate Biden Harris’ court choice: ‘We’re talking about the real possibility of war in Europe’ Bombings in eastern Ukraine and nuclear exercises in Russia increase blood pressure MORE quoted this estimate from Moody’s in the vice presidential debate.
In January 2021, Moody’s analysis of the American Rescue Plan Act projected the creation of 7.5 million jobs in 2021, a figure that was favorably cited by President BidenJoe BidenUS Ambassador to UN Calls Putin’s Peacekeepers ‘Nonsense’ US Moves Embassy Staff from Ukraine to Poland several times since.
Last month, a Moody’s report on the bipartisan infrastructure bill and reconciliation plan estimated that the infrastructure deal would add just $53 billion to the deficit over 10 years, well below the $256 billion CBO estimate – although the bill changed between Moody’s and CBO analysis. Moody’s Analytics also concluded: “Fears that the plan could trigger excessively high inflation and an overheated economy are overblown.
Moody’s Analytics models use bullish government spending multipliers that cast deficit spending in a favorable light, so producing bullish reports on Biden’s policies isn’t necessarily a sign of political bias. But given the central role that rating agencies play in the economy, one has to wonder what it would take for Moody’s and others to downgrade America’s credit rating.
For decades, Congress and presidential administrations have accumulated debt. Now there’s at least a slim chance of a debt ceiling crisis that Treasury Secretary Janet Yellen said would ‘do irreparable harm to the American economy and the livelihoods of all Americans’. .
This warning, combined with the country’s heavy debt burden, should cause rating agencies to objectively reassess the risks of a potential short- and long-term default.
In the aftermath of the 2008 financial crisis and the Great Recession, it was clear that rating agencies had failed to properly assess the default risks of residential mortgage-backed securities and secured debt securities. Now, it’s fair to wonder if they’re repeating those mistakes and failing to gauge the risks of federal government default.
Marc Joffe is a political analyst at Reason Foundation, former senior director of Moody’s Analytics and author of the study “Unfinished business: despite Dodd-Frank, rating agencies remain the weak link in the financial system.”