Friday October 31, 2014

Moody’s threatens U.S. debt rating cut, may downgrade major banks

Moody’s is considering downgrading the debt ratings of the U.S., Bank of America, Citigroup and Wells Fargo.

“Moody’s Investors Service warned Thursday that it might review the government’s AAA debt rating for a possible downgrade as early as next month,” the Wall Street Journal reports, “if there is no progress toward a deal in Washington to increase the $14.294 trillion federal borrowing limit and cut deficits.” Prices for U.S. debt fell Thursday after Moody’s warning, helping Treasury reverse some of Wednesday’s big rally that had pushed the yield on the 10-year Treasury note under the 3 percent mark. “Many traders and market participants dismiss outright the notion politicians would risk a default,” the Journal adds, “viewing the debate as political theater.” Stephen Hess, senior credit officer in Moody’s Sovereign Risk Group, states that if such a downgrade were to occur, the U.S. could face a lower rating for quite a while even after Capitol Hill lawmakers increase the debt ceiling.

According to Reuters, “Moody’s warning increases pressure on President Barack Obama and House of Representatives Speaker John Boehner, the top Republican in the U.S. Congress, to strike a deal soon or risk upsetting global financial markets.” Treasury Secretary Timothy Geithner has warned of a financial disaster if Congress does not increase the current $14.3 trillion borrowing cap by Aug. 2, when his department will exhaust the extraordinary cash management measures it has been utilizing since reaching the debt limit last month.

Separately, the Boston Globe is reporting that “Moody’s Investors Service may downgrade Bank of America, Citigroup, and Wells Fargo as the rating firm reviews whether the government will limit its support of the largest financial firms.” The three banks are considered by investors to be “too big to fail” after receiving federal government aid three years ago to bolster the financial system. Moody’s senior vice president Sean Jones says the government’s intent “is very clear. It does not want to bail out even large, systemically important banking groups.” All three have raised funds from private investors to repay the U.S. assistance and have been building capital in an effort to guard against a continued slide in housing prices.

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