October 7, 2013, 12:27 P.M. ET Moody’s: U.S. Need Not Default If Debt Ceiling Isn’t Raised

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With negotiations over the ongoing government shutdown quickly drawing in the looming debt-ceiling standoff, Moody’s says the U.S. doesn’t necessarily have to default on its debt right away even if the debt ceiling isn’t raised by the Oct. 17 deadline. Here’s Steven Hess of Moody’s in the rating agency’s latest credit outlook:

“We believe the government would continue to pay interest and principal on its debt even in the event that the debt limit is not raised, leaving its creditworthiness intact. The debt limit restricts government expenditures to the amount of its incoming revenues; it does not prohibit the government from servicing its debt. There is no direct connection between the debt limit (actually the exhaustion of the Treasury’s extraordinary measures to raise funds) and a default.”

Hess notes that interest payments on Treasury bonds and notes are due twice monthly, on the 15th and the last day of every month, so after October 17 the first interest payment is a relatively small $5.9 billion payment due Oct. 31, and the next is a larger $30.9 billion payment due November 15. He also points out that only debt interest payments are potentially affected, not principal:

The statutory debt limit is a limit on the amount of debt outstanding. As debt matures, it can be refinanced with new Treasury issuance without affecting the total amount of debt (principal). Interest, by contrast, is an expenditure and could be included among the expenses that the Treasury could decide not to pay.

And in case you were wondering if Washington is having more trouble reaching an agreement this year than it did during a similar battle two years ago because the amounts involved are larger this time around – nope, it’s just pure intransigence:

Is the situation worse now than it was in 2011, the last time that the debt limit was an issue? No. The budget deficit was considerably larger in 2011 than it is currently, so the magnitude of the necessary spending cuts needed after 17 October is lower now than it was then.

Source: Mike Aniero

5 COMMENTS

  1. I hope Moody’s is correct about this, but I have my doubts that Social Security and Medicare payments will go out if we go more than a month in default.
    I do like part of this article, though. The last paragraph is good news, although I already knew it.

  2. Although it’s clearly NOT going to happen this year, if the US ever defaults and the dollar loses world reserve currency status (which it will have to eventually) it might be upsetting for a while, but it could also be the best thing that ever happened to our country. We would certainly have to live within our means at that point, something we haven’t done since the Bretton Woods collapse of 1971 and the decoupling of the dollar from gold as payments of foreign debt.

    The whole damn economy is fake anyway. We all know it. Why is anyone getting upset about it? We still have the biggest guns. That’s all that really matters.

  3. So we are told Social Security is secure, but now the government tells us that it is weeks away from not being able to meet it’s obligations. Isn’t this the same government that wants us to also trust our healthcare to them?

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