U.S. expected to raise debt limit, avoid default

(Reuters) – Moody’s (NYSE:) Investors Service said on Tuesday the stable outlook on the United States’ Aaa rating reflects its view that the country would raise its debt limit and continue to meet its debt service obligations in full and on time.

U.S. Treasury Secretary Janet Yellen has warned that the government could run out of cash by Oct. 18 if the debt ceiling is not raised or suspended, cautioning it would be its first-ever default. A two-year suspension of the debt ceiling expired in July and Democrats and Republicans in Congress remain at odds over whether extend or raise it.

“At this stage, given Republicans’ staunch refusal to vote to suspend or raise the debt limit, we expect that Democrats will likely reach an agreement within their own party to raise the debt limit through the budget reconciliation process, which requires only a simple majority of Democratic votes in the Senate (50 senators and the vice president), in time to avoid a default,” the credit rating agency said in a report.

If the limit is not raised, Moody’s said it believes the government would prioritize debt payments “to preserve the full faith and credit of the U.S. government and avoid significant disruptions in the global financial markets.” Moody’s said the U.S. faces interest payments of about $4 billion on Oct. 15, $14 billion on Nov. 1, and $49 billion on Nov. 15 and that a missed payment would be classified as a default.

“Generally, we would not consider that outcome to be consistent with a Aaa rating and would most likely downgrade the rating for all Treasury securities, barring extraordinary

mitigating circumstances,” it said.

However, the impact on the U.S. sovereign credit profile and rating is expected to be limited as Moody’s said its ratings reflect the expected loss on debt with a U.S. default presumed to be short-lived and cured with a 100% recovery rate.

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