Moody’s Joins the Fun

July 30th, 2011 by Lee Eldridge

Moody'sJust a quick post this morning. As a follow up to the news from S&P’s on Thursday, Moody’s joined the discussion yesterday with a few comments of its own.

“Reductions of the magnitude now being proposed, if adopted, would likely lead Moody’s to adopt a negative outlook on the AAA rating,” the credit rating agency said in a new report. “The chances of a significant improvement in the long-term credit profile of the government coming from deficit reductions of the magnitude proposed in either plan are not high.”

Much like S&P’s comments that I posted yesterday, Moody’s is looking for a more substantial plan that will honesty tackle our long-term deficits.

Moody’s went on to clarify that as far as it is concerned, the nation will only default if it misses an interest or principal payment on U.S. debt, not if it misses payments on other obligations like federal employee salaries or Social Security benefits.

“If the debt limit is not raised before August 2, we believe that the Treasury would give priority to debt service payments and could thus postpone a potential debt default for a number of days,” it said. “Revenues would be more than adequate for some period of time to meet those payments, although other outlays would be severely reduced as a result.”

This is a point I made recently here. And if you’re paying attention, you might have noticed that the White House has changed it’s rhetoric from “defaulting on our debt” to “defaulting on our obligations”. We have enough money coming into the Treasury to pay our debt service, social security, Medicare, Medicaid, our military and more without interruption. At some point the federal government will have to shut down less essential services until the debt limit is raised, but this is a far cry from “defaulting on our debt”, and as far as I’m concerned, “defaulting on our obligations”.

Read more here from The Hill.

The Tea Party Gamble
The Tea Party continues to be painted as “economic terrorists” by the left, Democrats and the media. Even some Republicans have jumped on the bandwagon to chastise House members who side with the Tea Party cause. But what’s lost in this message? The Tea Party has been talking about the need for serious deficit reductions for months. And now both Moody’s and S&P’s have confirmed that in order to retain our AAA credit rating and stabilize our debt-to-GDP ratio, we need a long-term plan to bring our fiscal house in order much larger than any of the recent packages that have been discussed. In the words of S&P’s, a $4 trillion plan is only a “good down payment” and doesn’t solve our problems. It appears that the Tea Party has gotten it right from the beginning.

Now the Tea Party is gambling that it’s more important for them to be principled than to vote to pass a bill that doesn’t solve our problems. Moody’s says that the Reid plan and the recent Boehner plan do not qualify as a serious plans because of their magnitude — they’re too small. The Tea Party agrees.

The gamble is what happens after August 2nd if the debt ceiling is not raised? As Moody’s has confirmed, we will not default on our debt despite earlier comments made by the administration. But what will happen to the markets and to the economy?

My Prediction
The Harry Reid bill in its current form has no chance to pass the Senate. I think it’s likely we’ll get a new bill from Reid and Mitch McConnell soon. They will incorporate some of the spending cuts from the Boehner bill to pull in some Republican votes in the Senate and send it back to the House. And from there the Democrats and a handful of Republicans will pass the bill to raise the debt ceiling. The Tea Party Republicans will vote against it. How long will this take? It certainly won’t get done by August 2nd.


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