The pronouncements of credit-rating agencies haven't commanded quite the same respect in the markets since their role as enablers in the U.S. mortgage-backed securities debacle that nearly brought the global financial system crashing down. But what Moody's chief executive Raymond McDaniel has to say about the prospects of a U.S. default are worth noting.
Mr. McDaniel doesn't see a cataclysmic event on the horizon, even if Washington's bungling politicians can't manage to set their differences aside long enough to authorize a hike in the $16.7-trillion (U.S.) debt ceiling to cover the heftier spending tab. And despite all the hand-wringing of many of those same politicians and various doom-and-gloom market types – not to mention Moody's rival, Fitch Ratings, which warned last week that the Washington gridlock is putting the country's rating at risk – Mr. McDaniel is right. There will be no sudden default on U.S. government debt. Interest payments to bondholders will not be deferred, which should assuage the foreign central banks, governments and investors that account for about half the total owing. The United States is not about to morph into Argentina.
If its Oct. 17 deadline for more borrowing authority comes and goes, the U.S. Treasury has several manoeuvres it can use to conserve depleted cash. These include tapping a special account at the Federal Reserve, borrowing from a federal employees' pension fund, selling assets such as mortgage-backed securities and delaying transfers to the states. The Treasury has undoubtedly already squirrelled away enough money to cover maturing debt and interest payments coming due by the end of the month, and the Federal Reserve, which acts as the Treasury's banker, also assuredly has a contingency plan to buy more Treasury bonds. Such measures were readied the last time the politicians came close to this precipice in 2011.
At the end of the day, President Barack Obama could simply decide to prevent the calamity of a default by ordering the Treasury to sell more bonds – with the Fed as the ready buyer. He could also direct Treasury officials to meet certain obligations – with interest payments to bondholders at the top of the list – while delaying others that would not trigger immediate default. But Republicans could not be counted on to co-operate with any effort to expand presidential powers.
"Hopefully, it is unlikely that we go past Oct. 17 and fail to raise the debt ceiling," Mr. McDaniel told CNBC on Sunday. "But even if that does happen, then we think that the U.S. Treasury is still going to pay on those Treasury securities."
Failure to authorize more government borrowing would unleash a maelstrom of financial and economic pain. But it would almost certainly leave foreign bondholders whole – after a few tight-collar moments in the days ahead.