×

UPDATE 1-Moody's strikes less dire tone over U.S. debt ceiling

(Adds background, details)

Aug 24 (Reuters) - Moody's Investors Service on Thursday issued a less strident warning than a rival on the United States' credit rating if the White House and Congress fail to reach a deal to raise the debt ceiling before the government might run out of cash in less than six weeks.

Moody's view on a looming Washington showdown to increase the federal statutory borrowing limit from $19.9 trillion came a day after Fitch Ratings said the prioritization of debt service payments over other government obligations, should the debt ceiling not be raised, "may not be compatible with 'AAA' status."

Delays on non-debt payments including salaries to federal employees and payments to social programs such as Social Security would not result in Moody's stripping the U.S. government of its Aaa rating, the agency said in its annual analysis of the United States.

"If the Treasury were to fail to meet some of its non-debt obligations as a result of a political deadlock over this issue, that would not affect the U.S. sovereign rating because our ratings reflect the risk of default and loss on government debt, not the risk of failed or delayed payment on non-debt obligations," Moody's said.

U.S. government debt is seen as the most liquid and safest asset in the world. Traders fear a possible U.S. default would roil financial markets.

The government's interest payments in October are "relative small" but a sizable $35 billion in interest is due on Nov. 15 which is equivalent to the expected 16 percent of revenues for that month, Moody's said.

It is not clear how lawmakers, who are in recess and will return on Sept. 5, would achieve the votes to raise the debt ceiling even as Republicans control the White House and both chambers of Congress.

If the U.S. Treasury Department cannot sell more debt in early October due to the debt ceiling, the government would prioritize its obligations to preserve the full faith and credit of the U.S. government and financial market stability, Moody's said.

This may result in a partial government shutdown as it would delay or reduce 14 percent of its overall spending.

"A shutdown of some government operations - as would be inevitable in such a scenario - would be disruptive to the economy, and more disruptive the longer any shutdown went on," Moody's said.

Chances the debt ceiling would not be increase in time are "low" despite how contentious it has been recently to achieve a borrowing increase, Moody's said.

If the government does miss debt payments, "that would, as we have indicated in the past, have negative rating implications," it said. (Reporting By Richard Leong; Editing by Meredith Mazzilli)