Congressman Barney Frank: There Is A Chance The US Will Default

Moody’s Investors Service has placed the Aaa bond rating of the government of the United States on review for possible downgrade given the rising possibility that the statutory debt limit will not be raised on a timely basis, leading to a default on US Treasury debt obligations, the agency says on Wednesday.

“I think there are people who frankly have an unreal view of the world. They believe that this is somehow a fake and that you can push a button and make a lot of these debts go away.”

Barney Frank

“The review of the US government’s bond rating is prompted by the possibility that the debt limit will not be raised in time to prevent a missed payment of interest or principal on outstanding bonds and notes. As such, there is a small but rising risk of a short-lived default. Moody’s considers the probability of a default on interest payments to be low but no longer to be de minimis. An actual default, regardless of duration, would fundamentally alter Moody’s assessment of the timeliness of future payments, and a Aaa rating would likely no longer be appropriate. However, because this type of default is expected to be short-lived, and the expected loss to holders of Treasury bonds would be minimal or non-existent, the rating would most likely be downgraded to somewhere in the Aa range.”

Here’s the full press release:

New York, July 13, 2011 – Moody’s Investors Service has placed the Aaa bond rating of the government of the United States on review for possible downgrade given the rising possibility that the statutory debt limit will not be raised on a timely basis, leading to a default on US Treasury debt obligations. On June 2, Moody’s had announced that a rating review would be likely in mid July unless there was meaningful progress in negotiations to raise the debt limit.

In conjunction with this action, Moody’s has placed on review for possible downgrade the Aaa ratings of financial institutions directly linked to the US government:

Fannie Mae, Freddie Mac, the Federal Home Loan Banks, and the Federal Farm Credit Banks. We have also placed on review for possible downgrade securities either guaranteed by, backed by collateral securities issued by, or otherwise directly linked to the US government or the affected financial institutions.

RATIONALE FOR REVIEW:

The review of the US government’s bond rating is prompted by the possibility that the debt limit will not be raised in time to prevent a missed payment of interest or principal on outstanding bonds and notes.

As such, there is a small but rising risk of a short-lived default.

Moody’s considers the probability of a default on interest payments to be low but no longer to be de minimis. An actual default, regardless of duration, would fundamentally alter Moody’s assessment of the timeliness of future payments, and a Aaa rating would likely no longer be appropriate. However, because this type of default is expected to be short-lived, and the expected loss to holders of Treasury bonds would be minimal or non-existent, the rating would most likely be downgraded to somewhere in the Aa range.

The specific rating that would be assigned at the conclusion of the review once such a default is cured would depend on (1) the speed with which the default is cured;

(2) an assessment of the likely effect on future borrowing costs;

and (3) whether there is a change in process for raising the debt limit that would preclude another default.

A return to a Aaa rating would be unlikely in the near term, particularly if there were no progress on the third consideration.

While the debt limit has been raised numerous times in the past, and sometimes the issue has been contentious, bond interest and principal have always been paid on time. If the debt limit is raised again and a default avoided, the Aaa rating would likely be confirmed. However, the outlook assigned at that time to the government bond rating would very likely be changed to negative at the conclusion of the review unless substantial and credible agreement is achieved on a budget that includes long-term deficit reduction. To retain a stable outlook, such an agreement should include a deficit trajectory that leads to stabilization and then decline in the ratios of federal government debt to GDP and debt to revenue beginning within the next few years.

Moody’s does not take a position on what measures should be included in any deficit reduction package. Instead, it is the resultant deficit and debt trajectories that are relevant to the rating and its outlook.

And here is US Congressman Barney Frank, asked if there is a chance the US will be put into default:

“Yes. I take the freshmen republicans and people like Michelle Bachmann at their word. I don’t think they’re kidding. I think they fundamentally misread this situation as Bernanke, a Bush appointee after all, made clear today. I think there are people who frankly have an unreal view of the world. They believe that this is somehow a fake and that you can push a button and make a lot of these debts go away. I believe there are a substantial number of Republicans who are opposed to a huge debt and a further group of Republicans who understand why it’s important to raise the debt limit, but are afraid of losing a primary to someone.”

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“I think there is a very real chance that the unrealistic view of many of these new right wing Republicans and those who are intimidated by them could vote no.”

On Bernanke’s economic assessment today:

“I was encouraged by much of what [Bernanke] said. First of all, he made it clear that the economy is doing well and then he talked about that we’re retarding the growth. Every one of those things is outside of the president’s control. The Greek debt crisis, the Japanese earthquake/tsunami, the Libyan revolution — these are things that are not under our control that cause problems for us.”

“I was very pleased that he very thoughtfully drew a distinction between the need to have over the longer term serious debt reduction, but the danger of cutting too much into short-term. He talked about the headwinds that are retarding the economy and he said excessive fiscal tightening. We have lost – since the middle of 2009 – half a million jobs in the public sector. Those are not faceless statistics. Those are public works people who clean the streets. Those are police officers, firefighters, etc. I thought it was important that he said, one, we have to reduce the deficit over the long-term. and number two, it would be a calamity if we did not raise the debt limit. And three, separate out the importance of a longer-term binding debt reduction framework, but not exacerbating the obstacles to recovery by cutting too deeply in the next few months.”

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3 responses to “Congressman Barney Frank: There Is A Chance The US Will Default

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