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July 12, 2011 at 08:00 PM
Moody’s Investors Service says the challenges facing the U.S. government’s finances could have consequences for U.S. financial institutions that are vulnerable to U.S. sovereign risk.
Moody’s, New York, today “placed the U.S. government’s debt rating on review for possible downgrade,” the company says. “If a U.S. government debt-ceiling-related default were to occur, Moody’s would likely downgrade the Aaa U.S. government rating somewhere in the Aa range. A return to a Aaa rating would be unlikely in the near term.”
President Obama and members of Congress are in negotiations over efforts to raise a statutory limit on debt that could affect the ability of the government to make payments on its obligations. Moody’s is putting the U.S. government’s bond rating on review because of concerns about the ability the ability that the negotiations will fail.
A rating downgrade move could affect debt securities directly linked to the U.S. government, such as debt issued by the Temporary Liquidity Guarantee Program, and to agencies closely tied to the government, such as the federal mortgage guarantee agencies, the company says.
A downgrade of the U.S. debt rating all could lead to big cuts in the ratings of 8 banks that have high ratings partly because Moody’s considers them to be “too big to fail.”
In some cases, Moody’s says, it gives systemically important banks higher ratings than it gives their governments, because “governments have an array of tools to assist banks that go beyond the government’s ability to service its debt.”
The 4 U.S. insurers that have Aaa ratings from Moody’s — Teachers Insurance and Annuity Association of America, New York; United Services Automobile Association, San Antonio; New York Life Insurance Company, New York; and Northwestern Mutual Life Insurance Company, Milwaukee — have those ratings based on Moody’s assessments of their own operations, Moody’s says.
“However, these assessments are influenced by external conditions which can exert a meaningful influence on insurers’ intrinsic financial strength,” Moody’s says. “Over the next week, we will assess each of the four insurer’s unique business and investment concentrations relative to the domestic market as well as the short and/or long-term negative drivers of the domestic market. We anticipate that in the case of a 1-notch downgrade of the U.S. government, it is unlikely that the [insurer financial strength ratings] of these 4 groups will be affected. A multi-notch rating move could affect them, however, requiring one or more of these insurers being placed on review for possible downgrade.”
