Friday, July 29, 2011

What would Moody's consider a default?

We do not consider delayed payments for obligations other than debt service to be a default. The government will have to cut its spending by more than 40% after August 2 without an increase in the debt limit, since that is the proportion of spending that has been financed by debt issuance. To do so, it may delay payments for different kinds of obligations, such as the salaries of government employees, Social Security and Medicare payments, payments to companies that have contracts with the government, or debt service.

Governments from time to time make late payments to suppliers, for example, but Moody's does not consider that they have defaulted. Only if such payment arrears become substantial and appear to indicate a solvency problem would they have rating implications. In the present US case, the rise in payment arrears would simply be a substitute for the rise in public debt that would have normally occurred in the absence of the temporary constraint caused by the debt limit and, therefore, have no immediate credit implications. A missed interest or principal payment on a Treasury security, on the other hand, would constitute a default.

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