Moody’s Warns That a US Debt Downgrade Would Have Far-Reaching Effects

ValueWalk  ( Original )
FEB 9, 2018

What a strange consensus national mentality we’ve reached about governmental debt. The entire government can shut down because it is so reliant upon issuing new debt, and hardly anyone even notices.

Fictitious “debt ceilings” are hit over and over and over again, only to be raised over and over and over again, because…well, because without fresh debt the entire governmental system shuts down like Dracula without fresh blood. The government’s very lifeblood is more debt.

And while the ratings agencies have been little more than lapdogs to the banks and the Fed (remember that almost all garbage subprime mortgages were rated as essentially bulletproof-safe until the bitter end) for a long time, Moody’s pokes its head out and mentions that if the US continues along this course of madness, the eventual fallout will reach far and wide.

US financial institutions would suffer a heavy impact as many of these institutions hold Treasuries as collateral. Life insurers would be some of the most heavily impacted. According to credit ratings agency Moody's, if the US were to be downgraded, "It is unlikely that any property/casualty insurer would remain rated more than two notches above the sovereign, or any life insurer would remain rated more than one notch above the sovereign due to substantial investment exposure to the sovereign (including sovereign-linked/sensitive instruments), or shared fundamental economic drivers."

Central counterparty clearing houses will also feel the brunt of the downgrade as, according to Moody's, "Central counterparty clearing houses have very high dependency between their creditworthiness and that of the US, especially through their extensive use of US Treasurys as collateral resources." The Depository Trust & Clearing Corporation’s central counterparty clearing houses risk "being downgraded by the same magnitude" following a default event according to Moody's.

ORIGINAL SOURCE: Moody’s Warns Of US Debt Default Shock by Rupert Hargreaves at ValueWalk on 2/8/18