Moody’s Confirms: US Won’t Default

I missed this when it came out on Monday, but if you missed it too, it is worth noting: Moody’s has confirmed that, exactly as I wrote here, the federal government will not default on its debt obligations if Congress does not increase the statutory debt limit. Steven Hess, Moody’s principal U.S. sovereign credit analyst, said:

We believe the government would continue to pay interest and principal on its debt even in the event that the debt limit is not raised, leaving its creditworthiness intact. The debt limit restricts government expenditures to the amount of its incoming revenues; it does not prohibit the government from servicing its debt. There is no direct connection between the debt limit (actually the exhaustion of the Treasury’s extraordinary measures to raise funds) and a default.

The statutory debt limit is a limit on the amount of debt outstanding. As debt matures, it can be refinanced with new Treasury issuance without affecting the total amount of debt (principal). Interest, by contrast, is an expenditure and could be included among the expenses that the Treasury could decide not to pay.

There will be no default if Congress decides not to raise the debt limit. The government is required by the 14th Amendment to pay its debt obligations, and it can service our $17 trillion debt with less than 10% of federal revenues. This is not a close or a difficult question, and, as I noted here, the market is not showing any fear of a default. Because there can’t be one. Rarely has there been an issue on which journalistic malpractice has been so rampant.

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