U.S. debt limit negotiations to take time, but agreement expected -Moodys

U.S. debt limit negotiations to take time, but agreement expected -Moody's

NEW YORK (Reuters) – The U.S. Congress will likely reach an agreement on a new debt limit before the Treasury exhausts extraordinary cash management measures to stave off a debt default, Moodys Investors Service said on Thursday, adding however that protracted negotiations will likely cause volatility in markets.

The U.S. government hit its $31.4 trillion borrowing limit on Thursday, amid a standoff between the Republican-controlled House of Representatives and President Joe Bidens Democrats that could lead to a fiscal crisis in a few months.

Treasury Secretary Janet Yellen informed congressional leaders including House Speaker Kevin McCarthy that her department had begun using extraordinary cash management measures that could stave off default until June 5.

“Given an extremely fractious political environment, we anticipate an agreement will likely only be reached very late or in an incremental fashion, potentially contributing to flare-ups in financial market volatility,” Moodys said in a note.

Still, it said it expected the debt limit impasse to be solved before a missed payment occurs.

Should the Congress fail to reach an agreement on the debt limit, the U.S. government would still likely continue to meet its debt service obligations on time and in full, giving them priority over other payments, the rating agency said.

Recurring legislative standoffs over the debt limits this last decade have largely been resolved before they could ripple out into markets. That has not always been the case, however: A protracted standoff in 2011 prompted Standard & Poors to downgrade the U.S. credit rating for the first time, sending financial markets reeling.

Moodys said that while a U.S. missed interest payment was unlikely, it would consider it an event of default.

“A missed payment would have negative credit implications for the sovereign, but we would expect the default to be short-lived and cured with full recovery,” it said.

A potential rating downgrade would be limited, leaving the government close to its current triple-A status due to its capacity to repay debt, Moodys said, but it would likely affect the ratings of other borrowers such as companies and financial institutions exposed to the U.S. government.

(Reporting by Davide Barbuscia; Editing by Chizu Nomiyama and |Mark Potter)

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