13 July, 2011

Moody’s And A Clean Debt Ceiling Vote

My liberal friends think the Moody’s statement means that the debt ceiling debate is over and President Barack Obama (D-USA) has won. I’ve heard many times today that the GOP should just give Obama the clean debt ceiling hike, and move on. Here’s why:

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.

As I keep pointing out though, the ceiling is only part of the problem. Read the whole release.

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.

Translation: Our debt-to-GDP ratio is too high. Unless something is done about that as part of any debt ceiling increase, the rating will still be lowered. And unless sustained progress is made in this area, the rating will still be lowered.

So, no, a clean debt ceiling hike won’t help. Nothing has changed. We still need serious entitlement reform, and the President is still playing political games while the nation burns, and we’re all going to pay the price.

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