Amid Debt Ceiling Worries, Moody's Suggests Elimination

(July 18, 2011) — As bond-focused corporate and public pension funds grow increasingly concerned over the federal government’s inability to come to an agreement on raising America’s self-imposed debt ceiling, rating agency Moody’s has a suggestion: Just get rid of the ceiling altogether.

The rating agency has suggested that the United States eliminate its limit on government debt to lower uncertainty among bondholders. “We would reduce our assessment of event risk if the government changed its framework for managing government debt to lessen or eliminate that uncertainty,” Moody’s analyst Steven Hess wrote in a report.

Last week, the rating agency cautioned that it would slash the US’ AAA credit rating if the government misses debt payments. It noted that because lawmakers have acted to increase the debt ceiling, it had not previously considered the situation high-risk.

However, the current economic climate has intensified concerns. “The currently wide division between the House of Representatives and the Obama administration over the debt limit creates a higher level of uncertainty and causes us to raise our assessment of event risk,” the report said.

In May, Treasury Secretary Timothy Geithner told congressional leaders that the federal government had hit its debt ceiling of $14.3 trillion. As a result, he said he would begin turning to pension funds to increase the nation’s borrowing capacity. While skeptics have asserted that a failure to increase the debt ceiling would not significantly harm the economy, Geithner has continued to advocate the necessity of raising the limit, saying that a default on the federal debt would hurt the economy.

Meanwhile, amid growing concerns about the US sovereign credit quality, Standard & Poor’s has placed 76 fixed-income funds on credit watch as a result of their exposure to US Treasury and government agency securities. It said in a statement “there is a one-in-two chance that we would lower the ratings (on the funds) over the next 90 days by up to two notches.”

The statement added: “The action on the US government’s ‘AAA’ long-term and ‘A-1+’ short-term ratings reflects our view of two issues: the failure to raise the federal debt ceiling so as to ensure that the government will be able to continue to make scheduled payments on its obligations, and our view of the likelihood that Congress and the Obama Administration will agree upon a credible, medium-term fiscal consolidation plan in the foreseeable future.”