Moody’s hints at move that could be catastrophic for US debt
Moody said Monday that it would consider downgrading its triple-A rating for US Treasury Bonds if Washington continues to pile up record deficits. The move would make it significantly harder for the US to finance its debt by borrowing from other countries.
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The announcement was a sobering warning that the country’s burgeoning debt has weakened the country’s economic standing, and that US Treasury Bonds, traditionally a bullet-proof investment, could lose their sterling Aaa-rating if Washington cannot control its federal debt.
If Moody’s were to downgrade the country’s rating, the impact could be severe. It would signal to lenders worldwide that the US is no longer one of the safest places to invest money.
That, in turn, would threaten the country’s ability to borrow freely and extensively from other countries on favorable terms. Investors would likely demand a higher interest rate to finance US debt, which would push federal debt higher still.
“There’s a profound effect in this announcement,” says Max Fraad Wolff, a professor of economics at New School University in New York. “The US has always been the gold standard … and this begins to signal a fall or weakness in US global economic position. That’s a bit like a sea change.”
For now, a warning
Moody’s, one of three research and ratings firms that monitor issuers of stocks and bonds, clearly indicated its announcement was a warning, and that it would not downgrade the US’s rating soon.
“The ratings of all Aaa governments are currently well positioned despite their stretched finances,” Moody’s quarterly Sovereign Monitor reported.
Although it hasn’t yet taken any action to downgrade US ratings, Moody’s announcement will likely rattle investors and decrease investor confidence in US bonds.
Credit ratings are based upon the safety and success of a country’s economy and indicate to lenders how likely a borrower, like the US government, is to pay back a loan.