Moody's is placing the U.S. credit rating "under review" for a possible downgrade if lawmakers fail to make progress on a deal to raise the debt ceiling, the ratings agency announced in a statement released Wednesday.

As Reuters points out, Moody's is "first among the big-three rating agencies to place the United States' Aaa rating on review for a possible downgrade, which means a negative rating action is impending." Bloomberg notes that the U.S. last had its perfect rating put under review in 1995, and has been rated Aaa since 1917.

The Wall Street Journal Market Beat blogger Mark Gongloff says the move was "hardly unexpected" given the recent lack of progress in the negotiations between the White House and Congress. He provided the full text of the announcement, and highlighted the line he found particularly striking.

Moody’s Investors Service has placed the Aaa bond rating of the government of the United States on review for possible downgrade given the rising possibility that the statutory debt limit will not be raised on a timely basis, leading to a default on US Treasury debt obligations. On June 2, Moody’s had announced that a rating review would be likely in mid July unless there was meaningful progress in negotiations to raise the debt limit.

In conjunction with this action, Moody’s has placed on review for possible downgrade the Aaa ratings of financial institutions directly linked to the US government: Fannie Mae, Freddie Mac, the Federal Home Loan Banks, and the Federal Farm Credit Banks. We have also placed on review for possible downgrade securities either guaranteed by, backed by collateral securities issued by, or otherwise directly linked to the US government or the affected financial institutions.

RATIONALE FOR REVIEW

The review of the US government’s bond rating is prompted by the possibility that the debt limit will not be raised in time to prevent a missed payment of interest or principal on outstanding bonds and notes. As such, there is a small but rising risk of a short-lived default.

Trading was closed for the day when the statement was released, but Gongloff notes that already the dollar is trading lower, while "Treasurys aren't reacting much, surprisingly."

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Ray Gustini