Moody's Blues: Major Agency Threatens to Downgrade U.S. Credit Rating

Moody's Investors Service, one of the world's most respected and widely utilized sources for credit ratings, threatened to lower the United States' credit rating, citing the likelihood that the government will default on its debt.

The credit rating agency said it will have to adjust the government's triple-A bond rating, the highest rating awarded by Moody, because the White House and Congress are running out of time to raise the nation's borrowing limit and avoid a default.

The government reached its borrowing limit, which is currently $14.3 trillion, in May. The Treasury says the government will default on its debt if the limit is not raised by Aug. 2.

A downgrade could mean several things. First, it could raise interest rates on U.S. treasury bonds, increasing the interest paid by U.S. taxpayers. It could also push up rates for mortgages, car loans and other debts, which are linked to Treasury rates.

Moody's had warned in June that it would take this step if lawmakers failed to make progress on an agreement by mid-July. The other credit ratings agencies, Standard & Poor's and Fitch, have said they may make similar moves.

"An actual default, regardless of duration, would fundamentally alter Moody's assessment of the timeliness of future payments," said a report released by Moody's.

If the U.S. does default, it would most likely be short-lived. However, Moody's said it would still downgrade U.S. debt to double-A (the second-highest of nine rankings under Moody's system).

This would mark the first time since Moody's first started evaluating the country's debt in 1917 that they would give anything but top marks to the U.S.

Jeffrey A. Goldstein, a Treasury Department official, said the announcement is a "timely reminder of the need for Congress to move quickly ... and agree upon a substantial deficit reduction package."

"Right now we've got these dysfunctional debt limit talks," said Robert Bixby, executive director of the Concord Coalition, formed in 1992 as a non-partisan group that focuses on ending deficit spending and promoting a balanced budget in the federal government.

"It's not surprising that an agency like Moody's would weigh in and say, `Hey guys, this is the real world,'" he said.

(The Appreciated Press contributed to this story)