Moody’s: Default not a danger in debt limit standoff

The United States is not in danger of defaulting on its debt if Congress fails to raise the debt limit imminently, according to a top credit rater.

Moody’s Investors Service announced Monday that, despite dire warnings from the Treasury Department, the government would find a way to pay money owed on its debt, regardless of whether lawmakers agree to raise the $18.1 trillion borrowing cap.

{mosads}Rather, the rater said the government would find a way to make sure bondholders were paid above all others, resulting in more drastic cuts elsewhere if the government could no longer borrow.

“Even if the debt limit is not raised, we believe the government will order its payment priorities to allow the Treasury to continue servicing its debt obligations,” says Moody’s Senior Vice President Steven Hess.

Treasury Secretary Jack Lew has pushed lawmakers to act on the borrowing limit before Nov. 3, when his department’s tools to operate under the cap are exhausted. After that, the government would be left with just cash on hand to pay all bills coming due, which most analysts believe would last just a few days before the government could no longer meet all obligations.

While Moody’s is confident Washington will find a way to address the debt limit before the deadline, it is also confident that if no deal emerges, the government will ensure that the holders of Treasury debt are paid, above all others.

However, the rater is taking a relatively narrow perspective, analyzing just what would happen to U.S. sovereign debt if the debt limit were not raised. Without additional borrowing authority, the government would have to make severe cuts elsewhere to ensure bondholders were paid on time, which could lead to other economic disruptions, according to outside experts.

“Anyone who is attempting to predict with certainty or near-certainty the impacts of an ongoing impasse is displaying inappropriate confidence,” said Shai Akabas, associate director for economic policy at the Bipartisan Policy Center. “Policymakers must weigh these risks as they determine a course of action, and they should not be lulled into thinking that the only consequential risk is an actual default on the debt of the United States.”

Moody’s estimated that without a debt limit deal, the government would need to cut expenditures by 11 percent across fiscal 2016 to stay in the black. But it also warned that the government’s balance sheets fluctuate widely from month to month, and November is a month that typically posts high deficits.

Moody’s stance that the Treasury would prioritize payments to ensure critical bond payments are made before all others run counter to the administration’s stance that the issue is immensely complex and government payment systems are not built for that purpose.

But all the concern about default could be moot, following reports that the White House and congressional leaders are nearing a deal to address the debt limit and set the federal budget for the next two years.