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Moody's warns of U.S. downgrade

U.S. currency.

UPDATED INTERVIEW

STEVE CHIOTAKIS: The credit rating agency Moody's says it plans to review the U.S. government's bond rating -- currently at the highest level, triple-A -- because of growing uncertainty over whether the U.S. will raise its debt limit before August 2. That's the day marked by Treasury as the final day before potential default.

Marketplace's David Gura is with us live from Washington with latest on that. Good morning, David.

DAVID GURA:

CHIOTAKIS: How is this going to affect the debt the debt talks going on in Washington?

Well, this could be a warning shot, something that could scare politicians a little bit. Maybe show them what could happen if they can't agree to a deal.

I talked to Jan Randolph is with IHS Global Insight and I asked him what this looks like from London, where he's based.

JAN RANDOLPH: The way they're managing the budget and the deficit and the debt ceiling is moving from one cliffhanger to the next, and that simply isn't the way one should run any finances, let alone that of the largest economy in the world.

Another risk analyst told me a downgrade could be "potentially seismic," Steve.
Something that would affect investors around the world.

GURA: So connect the dots then, David. How have the debt talks turned into this global concern?

CHIOTAKIS: Well interest rates on U.S. government debt would go up immediately. Bond investors would get skiddish. This situation may be an even bigger problem because other countries, and we've talked about them, Steve -- Greece, Ireland -- as you know they're dealing iwth debt issues of their own.

CHIOTAKIS: And who's watching closest? Who doesn't get paid if the U.S. can't pay its bills?

GURA: The U.S. would have to make some tough decisions about this. What it'd be able to pay. Whom it'd be able to pay. For instance, if it can't afford to pay both federal employees and Social Security benefits, which would it pick? How would it prioritize that? And of course, there are all the investors that own U.S. debt -- foremost among them, Steve: China.

CHIOTAKIS: Marketplace's David Gura, reporting from Washington.



ORIGINAL INTERVIEW

JEREMY HOBSON: The rating agency Moody's says it will review the US government's credit score -- our bond rating -- which is currently at the highest possible level: triple-A. The review, Moody's says, is because of growing uncertainty about whether the U.S. will raise the debt ceiling, and avoid a default.

Marketplace's David Gura joins us now live, from Washington with the latest. Good morning.

DAVID GURA: Good morning Jereme.y

HOBSON: Well David, how serious is this warning of a possible downgrade?

GURA: Well, it's potentially very serious if it lends up leading to a downgrade. One analyst I spoke to said that could be "potentially seismic." Now sometimes we hear about bonds downgraded in other places to junk level -- I should say we're not anywhere near that, but if Moody's downgraded the U.S. even one level to say double-A, interest rates would start to go up immediately.

I talked to Jan Randolph, he's with IHS global insight in London and specializes in economic risk. He told me there would be a cascade effect of rising borrowing costs.

JAN RANDOLPH: Starting with the state itself, moving down into the banking system and the corporate world, and even at the household level. In other words, the entire edifice of interest rates will start to creep up.

So, in other words, the U.S. government would pay more, banks would pay more, companies would pay more to buy stuff, and people would have to pay more, Jeremy to buy homes or cars.

HOBSON: And David the debt talks continue today. There was this news yesterday about a Presidential walkout after some frustration in the talks. Is this Moody's warning likely to change the dynamic?

GURA: Risk analysts I spoke to said this may be a warning shot for politicians. I should say there was a warning like this in the mid-90s before the U.S. government shutdown. When Moody's made this announcement it said the driving factor behind its decision wasn't the debt or the deficit. It's this uncertainty about what'll happen over these next few weeks.

HOBSON: Marketplace's David Gura in Washington. David thanks.

GURA: Thanks.

About the author

David Gura is a reporter for Marketplace, based in the Washington, D.C. bureau.
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aren't these the same people who knowingly rated all of those toxic mortgage backed securities as AAA? If the free market had any ability to self regulate, the Moody's and S&P would be with Arthur Anderson

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