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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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Ultimately, a downgraded rating would make borrowing more expensive and threaten the US’s ability to keep spending far more than it takes in from tax revenue, a risk the country can ill afford as it plans to ratchet up spending on everything from unemployment benefits to healthcare to Social Security.

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“If markets perceive US federal debt as more dangerous, the cost of borrowing money rises,” says Wolff. “The federal government presently owes $10.5 trillion. If the cost of borrowing rises, it’s a particularly big deal if you owe a lot of money, like US government.”

It would also exacerbate the US’s current debt, said Pierre Cailleteau, Managing 
Director of Moody's Sovereign Risk Group.

"At the current elevated levels of debt, rising interest rates could quickly compound an already complicated debt equation, with more abrupt rating consequences a possibility," Mr. Cailleteau said in the report.

In it’s report, Moody’s said debt levels in the US were to blame for its threatened economic standing.

“This is a signal to the US government: don’t keep spending like this, we are displeased with it," says Wolff.

A global concern

Similar problems in Europe have triggered this announcement, Wolff adds. “Problems in Portugal, Ireland, Italy, and Greece, have reawakened questions about the quality of sovereign debt,” he says.

The Obama administration estimates US deficit (the difference between how much money a government takes in and how much it spends) will rise to 10.6 percent of GDP this year, the highest level since 1946. Federal debt (money the government owes lenders) will likely reach 64 percent of GDP.

The US can straighten up its balance sheet – for example, raising taxes and cutting spending – to stave off a downgrade, says Moody’s.

“A key issue is whether governments are able and willing to implement such unprecedented adjustments,” said Mr. Cailleteau, in a statement.