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Moody’s Debt Default Statement Doesn’t Adequately Address Risks

Monday, October 26, 2015

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Washington, D.C. – Moody’s comments on debt default this morning do not adequately represent the risks of the current impasse, Shai Akabas, associate director for economic policy at the Bipartisan Policy Center (BPC), said.

“Moody’s stated its belief that the United States is not in imminent danger of defaulting on its debt as a result of failure to raise the debt limit. Holders of credit default swaps on U.S. debt may find this analysis useful, but it does not adequately represent the risks and impacts that are already manifesting from the current impasse.

“Short-term U.S. Treasury rates have risen in recent days, likely a direct result of investor cautiousness with regard to this issue. The Treasury Department has postponed a scheduled auction of 2-year notes. BPC discussed risks and costs along these lines in our latest report, and the Government Accountability Office has similarly detailed those associated with prior debt limit impasses.

“Moreover, Moody’s assumes that Treasury would be able to seamlessly prioritize payments and manage all cash flows in an unprecedented operating environment where the Department has no net borrowing authority. BPC’s report discusses the difficulty and uncertainty surrounding this process.

“Anyone who is attempting to predict with certainty or near-certainty the impacts of an ongoing impasse is displaying inappropriate confidence. All that can be definitively stated is that the risks of inaction increase by the day. Policymakers must weigh these risks as they determine a course of action, and they should not be lulled into thinking that the only consequential risk is an actual default on the debt of the United States.”

Shai Akabas is available for comment.