Moody’s Places U.S. on Review for Downgrade As Debt Talks Stall

Moody’s Investors Service put the U.S. under review for a credit rating downgrade as talks to raise the government’s $14.3 trillion debt limit stall, adding to concern that political gridlock will lead to a default.

The Aaa ratings of financial institutions directly linked to the U.S. government, including Fannie Mae, Freddie Mac, the Federal Home Loan Banks, and the Federal Farm Credit Banks, were also put on review for cuts, Moody’s said in a statement today.

The U.S., rated Aaa since 1917, was put on review for the first time since 1995. Even a temporary default by the U.S. would likely have “large systemic effects” on the economy and Treasury finances by disrupting money funds, the repurchase- agreement market and foreign investor willingness buy the government’s debt, JPMorgan Chase & Co. said in a report.

“A U.S. government default is something the markets aren’t prepared to deal with,” said Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott LLC in Philadelphia. “It’s hard to get 535 people to agree on anything, much less something as contentious as trillions of dollars of spending and taxes.”

Treasury Secretary Timothy F. Geithner said he has taken steps to prevent a federal default until Aug. 2, using accounting measures that involve two retirement funds. The U.S. reached its borrowing limit on May 16.

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