Moody's warns on govt shutdown

http://www.washingtonpost.com/blogs/post-politics-live/liveblog/live-updates-the-shutdown-4/?hpid=z2#c1e3ada3-dc00-41d8-92cb-327c5c814d82

By: Lori Montgomery

One of the nation’s top credit-rating agencies says that the U.S. Treasury Department is likely to continue paying interest on the government’s debt even if Congress fails to lift the limit on borrowing next week, preserving the nation’s sterling AAA credit rating.

In a memo being circulated on Capitol Hill Wednesday, Moody’s Investors Service offers “answers to frequently asked questions” about the government shutdown, now in its second week, and the federal debt limit. President Obama has said that, unless Congress acts to raise the $16.7 trillion limit by next Thursday, the nation will be at risk of default.

Not so, Moody’s says in the memo dated Oct. 7.

” We believe the government would continue to pay interest and principal on its debt even in the event that the debt limit is not raised, leaving its creditworthiness intact,” the memo says. “The debt limit restricts government expenditures to the amount of its incoming revenues; it does not prohibit the government from servicing its debt. There is no direct connection between the debt limit (actually the exhaustion of the Treasury’s extraordinary measures to raise funds) and a default.

The memo offers a starkly different view of the consequences of congressional inaction on the debt limit than is held by the White House, many policymakers and other financial analysts. During a press conference at the White House Tuesday, Obama said missing the Oct. 17 deadline would invite “economic chaos.”

The Moody’s memo goes on to argue that the situation is actually much less serious than in 2011, when the nation last faced a pitched battle over the debt limit.

“The budget deficit was considerably larger in 2011 than it is currently, so the magnitude of the necessary spending cuts needed after 17 October is lower now than it was then,” the memo says.

Treasury Department officials did not immediately respond to requests for comment.