A second major credit rating agency is warning the U.S. government that it could lose its sterling debt rating if Congress and the Obama administration don't reach an agreement to raise the nation's borrowing limit.
Moody's Investors Service said Thursday that if the parties fail to make progress soon, it would put the U.S. rating under review for a possible downgrade. That's because there's a "very small but rising risk" that the government will default on its debts.
Standard & Poor's, another major credit rating agency, issued a similar warning in April.
The U.S. government hit its $14.3 trillion borrowing limit on May 16. The debt limit is the amount the government can borrow to help finance its operations.
Moody's also said Thursday that it may downgrade the debt ratings of Bank of America, Citigroup and Wells Fargo, citing concerns about waning U.S. political willingness to offer support for the largest banks.
The sweeping Dodd-Frank financial reform law is eliminating the certainty of U.S. governmental support that some "too big to fail" banks needed to survive the financial crisis, Moody's said on Thursday.
Lower ratings can translate into higher borrowing costs, which can have a big impact on a bank's bottom line. They can also force banks to post more collateral in derivative trades.
But the ratings agency acknowledged an overall improvement in the operations of Bank of America and Citigroup since the crisis. That recovery could compensate for the changing political environment and lessen the severity of any downgrade, Moody's said on Thursday.
A move by Moody’s or S&P to lower the credit rating on U.S. government debt could ripple through the U.S. economy and ultimately hurt consumers. That's because many loans, including mortgages, tend to follow yields on U.S. Treasury bonds. So interest rates could rise.
Moody's also warned the government could face a downgrade if it fails to come up with a long-term plan to reduce the country's deficit. The federal budget deficit is on pace to exceed $1 trillion for the third straight year.
Moody's said it had expected strong political debate over the topic. But the entrenchment of both sides is greater than it anticipated.
On Thursday, Congressman Steny Hoyer, said he wanted to reassure financial markets that the United States would not default on its debt and that the White House and Congress would reach a deal to lift the country's borrowing limit.
Hoyer, the No. 2 Democrat in the House , expressed confidence in the ability to reach an agreement as he spoke to reporters after a meeting with President Barack Obama.
President Barack Obama and Republicans both have said the country needs to reduce its annual deficits. But they are at odds over how to do it. Republicans insist cutting spending without tax increases. Democrats say any plan should include both.
Obama met privately with both parties this week to discuss the issue but no progress has been made.
Time is growing short. The Treasury Department has said the U.S. government is at risk of a default if it does not raise the borrowing limit by Aug. 2.
"The heightened polarization over the debt limit has increased the odds of a short-lived default" by the government, the rating agency said. "If this situation remains unchanged in coming weeks, Moody's will place the rating under review."
In April, Standard & Poor's for the first time lowered its long-term outlook for the government's fiscal health from "stable" to "negative." And it warned that it could strip the government of its top credit rating over the next two years if lawmakers failed to reach a deal to control the massive federal deficit.
On Thursday, the U.S. Federal Reserve released data showing that its balance sheet swelled to record levels last week, as the central bank bought more bonds in an effort to support the economy.
The purchase was part of its $600 billion program, known as “quantitative easing,” aimed at stimulating investment and economic activity. The bond-buying program is set to end June 30, but the central bank will continue to use proceeds from maturing bonds to buy more of them.
