Moody’s: U.S. downgrade, default unlikely as X-Date approaches

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May 23, 2023 View in browser   By Sam Sutton Presented by Editor’s note: Morning Money is a free version of POLITICO Pro Financial Services morning newsletter, which is delivered to our subscribers each morning at 5:15 a.m. The POLITICO Pro platform combines the news you need with tools you can use to take action on the day’s biggest stories. Act on the news with POLITICO Pro. Programming Note: We’ll be off this Monday for Memorial Day but will be back in your inboxes on Tuesday.  Even as the U.S. moves closer to a potential default, Moody’s is still bullish that President Joe Biden and House Speaker Kevin McCarthy can avoid the worst. William Foster, a senior vice president and senior credit officer in Moody's Sovereign Risk Group, said his team expects policymakers to reach an agreement before June 1 — which would spare Treasury from having to prioritize payments on government debt. Even if that were to happen, the odds of the U.S. missing an interest payment on its bonds remains very low and a downgrade from Moody’s remains unlikely, he said. But, but, but: The ratings service’s outlook on the U.S. sovereign credit — now stable — could shift. “If we got past the X-Date where we're in a period where there was prioritization of payments — and interest was continuing to be paid, but other payments were missed — we would have to reassess at that point,” Foster said in a conversation with POLITICO’s financial services team on Monday. Treasury Secretary Janet Yellen over the weekend offered a glimpse of what payments her department would have to make if Congress fails to raise the debt limit in time, including Social Security, the military and certain contractors, as well as on government bonds. It’s far from clear how that would work. “It’s never happened before,” Foster said. If it does, “the political pressure, the financial market pressure and the economic impact that you'd see if this lasted more than a few days — [that] would really build and it would be sufficient to force policymakers to some kind of agreement,” he added. What would the market reaction to prioritization look like?: Recognition that Treasury could meet its obligations to bondholders and certain programs might “allow for more of a ramp towards armageddon, as opposed to flipping a switch,” Tony Roth, the chief investment officer of Wilmington Trust Investment Advisors, told your host late Monday afternoon. That doesn’t mean the reaction would be sanguine, however. Instead, there’d likely be “a very short window” with “very intense pressure” from markets for policymakers to reach an agreement, he said. Democrats like Rep. Brendan Boyle (D-Pa.), the ranking member on House Budget, have argued that investors could hasten the debt limit talks if they were to “accurately price in that risk” of default. Stocks cratered in 2011 as then-President Barack Obama tussled with congressional Republicans over a debt limit package that ultimately led to major government spending cuts. With perhaps a little more than one week to go and no deal on the table, that’s still a possibility. “We will have an important role on Wall Street, but it will be by voting with our feet and moving stock prices to reflect our pleasure or displeasure with whatever deal is being proposed,” Phil Orlando, the chief equity market strategist at Federated Hermes, said in an interview. IT’S TUESDAY — Send tips, gossip and suggestions to Sam at ssutton@politico.com and Zach at zwarmbrodt@politico.com. A message from the Investment Company Institute: Secure Financial Future (SFF) empowers investors to make more informed investment decisions through educational resources regarding various investment options, as well as insights on policies and regulations that impact their savings. SFF is an initiative of the Investment Company Institute (ICI), the leading association representing regulated investment funds. ICI’s mission is to strengthen the foundation of the asset management industry for the ultimate benefit of the long-term individual investor. Learn more.   Driving the day Dallas Fed President Lorie Logan speaks at 9 a.m. … Data on new home sales out at 10 a.m. … Federal Housing Finance Agency Director Sandra Thompson testifies at 10 a.m. at House Financial Services … Citi CEO Jane Fraser will speak at the Investment Company Institute’s Leadership Summit at 4:15 p.m. … CFTC Commissioner Christy Goldsmith Romero will have a fireside chat at the New York City Bar’s White Collar Crime Institute at 6 p.m. … Biden/McCarthy — Our Sarah Ferris and Adam Cancryn: “Speaker Kevin McCarthy and President Joe Biden ended their face-to-face meeting on Monday still short of a deal to avoid a U.S. debt default that could come as soon as June 1. Yet McCarthy described the tone of the meeting “better than any other” discussion, adding that negotiators for both parties will continue working.” — Our Sarah Ferris: “McCarthy said Monday he remains confident that Congress could still beat a possible June 1 default deadline despite the weekend stall in talks with the White House.” — Business Roundtable CEO Joshua Bolten: “We are hopeful … From widespread job losses and decimated retirement savings to higher interest rates on credit cards, car loans and mortgages, every American will be affected if the U.S. defaults. The clock is ticking, and Business Roundtable urges both sides to move swiftly to secure bipartisan legislation that can pass the House and Senate and prevent a devastating default.” Fading fast — Our Victoria Guida reports that the Federal Reserve’s annual report on household finances found inflation “had eaten away” at Americans’ cash buffers and “left people less able to cover expenses from unexpected emergencies.” Still here — Bloomberg’s Hannah Levitt: “Jamie Dimon, whose counterpart at Morgan Stanley just announced he’ll depart in the next 12 months, said he’s still invigorated and has no plans to quit anytime soon.” — Bloomberg’s Max Reyes and Max Abelson: “JPMorgan says the US economy is ‘doing fine’ for now, but the bank sees ‘signs of deterioration.’ Its economic models generally expect a ‘mild recession.’” Remember, Scott’s popular on Wall Street — Our Natalie Allison on Sen. Tim Scott’s presidential bid: “While other candidates, including Trump and DeSantis, are being aided by super PACs that have already raised big money, Scott formally enters the field with nearly $22 million, more campaign cash than any past presidential candidate.” Stakes are high — From Zach: The debt-limit stalemate is poised to be a career-defining test for Treasury Secretary Janet Yellen and her team of seasoned bureaucrats, who in as little as 10 days may be forced to take unprecedented steps to avert a global meltdown.   A message from the Investment Company Institute:   Fed File It ain’t over — Bloomberg’s Steve Matthews and Catarina Saraiva: “Federal Reserve Bank of St. Louis President James Bullard backed two more 2023 interest-rate increases and his Minneapolis colleague Neel Kashkari said if the central bank pauses next month it should signal tightening isn’t over.”   GET READY FOR GLOBAL TECH DAY: Join POLITICO Live as we launch our first Global Tech Day alongside London Tech Week on Thursday, June 15. Register now for continuing updates and to be a part of this momentous and program-packed day! From the blockchain, to AI, and autonomous vehicles, technology is changing how power is exercised around the world, so who will write the rules? REGISTER HERE.     In the markets Rise of the shadow banks — Reuters’ Tatiana Bautzer and Saeed Azhar: “The turmoil facing U.S. regional banks has prompted some lenders to step back, leaving space for investors such as asset managers, private equity (PE) funds and insurers to lend more.” Long tail of WFH — The WSJ’s Peter Grant: “Share prices for some of the largest office landlords have dropped to near historic lows, reflecting a sluggish return-to-office rate and a rise in the number of investors betting that these stocks will keep falling.” Notifications on ‘off’ — Our Alfred Ng: “With an unprecedented $1.3 billion fine Monday, Meta became the first American tech giant ordered to shut off its transatlantic flow of user data under European privacy rules — putting new pressure on the Biden administration to solve a major disconnect between American and European data regulations.”   DON’T MISS POLITICO’S HEALTH CARE SUMMIT: The Covid-19 pandemic helped spur innovation in health care, from the wide adoption of telemedicine, health apps and online pharmacies to mRNA vaccines. But what will the next health care innovations look like? Join POLITICO on Wednesday June 7 for our Health Care Summit to explore how tech and innovation are transforming care and the challenges ahead for access and delivery in the United States. REGISTER NOW.     Fly Around United Nations Secretary-General António Guterres backed the reform of the U.N. Security Council and the international financial system to align them with the “realities of today’s world.” — Our Gregorio Sorgi A message from the Investment Company Institute: Secure Financial Future (SFF) offers a range of resources for retail investors to help them understand various investment options, regardless of their financial expertise. SFF also keeps investors informed about new policies and regulations coming out of Washington which may impact their investment options. By staying on top of these developments, investors can make better-informed choices and speak up for policies that protect them. So, whether the goal is buying a home or retiring comfortably, SFF helps support investors on their path toward a secure financial future and gives them a voice to shield their investments from misguided policies and regulations. Learn more at SecureFinancialFuture.org.     Follow us on Twitter Mark McQuillian @mcqdc Ben White @morningmoneyben Victoria Guida @vtg2 Katy O'Donnell @katyodonnell_ Zachary Warmbrodt @Zachary Sam Sutton @samjsutton   Follow us

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