Moody's Puts U.S. Credit Rating Under Review

Moody's Investor Services is putting the United States' top-notch credit rating under review for a possible downgrade. The credit ratings agency's action comes as lawmakers continue talks on how to raise the U.S. debt ceiling. Robert Siegel talks to NPR's Jim Zarroli.

ROBERT SIEGEL, host:

President Obama and congressional leaders have wrapped up another round of talks on the federal government's debt ceiling. It was their fourth meeting in as many days at the White House.

The parties appear no closer to a deal. Both sides described today's talks contentious and say President Obama walked out after delivering some tough words to lawmakers.

Underscoring the pressure is an announcement today from Moody's Investor Services. The credit ratings agency has placed U.S. debt on review to be possibly downgraded from its blue chip, AAA credit rating. Moody's says it's taking the action because of the rising possibility that Congress will not raise the government's debt ceiling before an August 2nd deadline, triggering a government default.

NPR's Jim Zarroli explained to us what Moody's said and what that means.

JIM ZARROLI: Well, it placed the United States on what's called a credit watch. It said because Congress and the White House haven't been able to resolve this dispute and because the August 2nd deadline is approaching, there's a small but growing risk of a debt default.

And this credit watch applies not just to the debt that is issued by the Treasury Department; it also applies to all of the financial agencies that are linked to the government - Fannie Mae and Freddie Mac in particular. It also applies to any securities that are linked to or guaranteed by the U.S. government, which includes a lot of things, including, for instance, bonds issued by Israel and Egypt.

SIEGEL: But, once again, we're talking about a review. This isn't an actual downgrade at this point, correct?

ZARROLI: No, right. This is a warning, but that's the way the rating agencies do it when they issue a downgrade. They sort of telegraph it ahead of time that they're going to do this.

But what it means is that if things continue the way they are, they will lower the rating. They won't lower it much, just one notch probably, but still, it would be a pretty dramatic thing to happen because, you know, the United States has always had AAA credit rating. It's sort of the gold standard around the world.

SIEGEL: Well, what would the consequences be of the U.S. being taken down a notch from AAA?

ZARROLI: Well, it would instantly raise the cost of borrowing by the United States, and that's a pretty big deal because, as you know, the United States is borrowing a lot these days. So that would be much more expensive. And that's the kind of thing that tends to seep into other forms of credit, consumer credit, like mortgages, also business loans.

And that is not the kind of thing you want to see happen in an economy at a time like this when, of course, we're in recovery, but the recovery has been pretty anemic. Growth is so weak. This is the kind of thing that could set that back.

SIEGEL: Jim, I want to ask you about one scenario that some Republicans have mentioned, which is after August 2nd no increase of the debt ceiling, the U.S. could continue to pay the country's creditors, bondholders, but it wouldn't make other payments. Would Moody's - would a review like Moody's look askance at something like that, saying, well, you're not paying off your other obligations, which aren't bonds?

ZARROLI: Yeah. I think they would be concerned that this would just put the United States in a position to have to pick and choose what kind of debts it's going to pay. You get the political process involved in that. I think that would frighten a lot of investors, the people all over the world, people in countries all over the world who buy U.S. Treasury debt and kind of depend on it as a liquid and safe form of investment.

I think that it's sort of getting into an area that's risky and dangerous and a sort of unknown territory, and I think all of the rating agencies would sort of be nervous about that.

SIEGEL: OK. Jim, thank you.

ZARROLI: You're welcome.

SIEGEL: That's NPR's Jim Zarroli in New York.

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