Credit rating agency Moody’s has delivered a calming verdict on the U.S. fiscal situation, confirming its “stable outlook” on the nation’s AAA sovereign credit rating and expressing its view that Congress will raise the debt ceiling this month.
In a note on Tuesday, Moody’s analysts said they believe that the country’s debt limit “will ultimately be raised and that the U.S. will continue to meet its debt-service obligations on time and in full.” While “ongoing political polarization” on Capitol Hill has held up debt ceiling negotiations between lawmakers, the analysts said congressional Democrats will likely “use the budgetary reconciliation process”—which allows the party in control of Congress to pass legislation with a filibuster-proof simple majority—“to raise the debt limit in time to avoid a missed interest payment.”
Moody’s confident outlook comes after rival credit ratings agencies S&P and Fitch each recently raised concerns about the possible impact of a failure by Congress to raise the current $28.4 trillion debt ceiling. Such an event would effectively see the U.S. default on its debt obligations before the end of October and potentially lead to “widespread economic catastrophe,” as Treasury Secretary Janet Yellen wrote in a recent Wall Street Journal op-ed.
The far-reaching economic consequences would include “significant disruptions” to the global financial markets, Moody’s said, while the U.S. government “would be unable to meet approximately 40% of all payments” in the following weeks, according to an estimate by the Bipartisan Policy Center. That would include Social Security benefits, Medicare and Medicaid payments, wages for government workers and military members, and other federally funded programs.
“Every item of federal spending is going to be affected,” Paul Van de Water, a senior fellow at the Center on Budget and Policy Priorities think tank, told Fortune recently.
The U.S. would almost certainly see its credit rating downgraded by the major agencies in the event of a default. It would also likely see a spike in the interest rates on U.S. Treasury bonds, which have long been viewed among the world’s safest investments and have historically benefited from low interest rates as a result. A default would erode investor confidence in U.S. government-backed debt, which would lead to higher interest rates—not just on the benchmark 10-year Treasury bond but on a wide array of loans tied to it, including home mortgages, auto loans, and other kinds of consumer debt.
But despite the potentially serious fallout, Moody’s said it believes such fears are overblown as the situation currently stands. “We expect that Democrats will likely reach an agreement within their own party to raise the debt limit…in time to avoid a default,” the analysts wrote.
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