Credit Rating Firm Wants U.S. To Abolish Debt Limit

Politico reports:

The United States should do away with the debt ceiling altogether to bring greater certainty to investors in U.S. Treasury bonds, Moody’s suggested Monday.

With the August 2 deadline for raising the debt ceiling barely more than two weeks away, the bond-rating agency issued a report Monday noting that the U.S. is one of just a few countries that has a statutory borrowing limit and saying that the limit creates “periodic uncertainty” for investors, Reuters reported.

Moody’s threatened last week to downgrade the AAA rating of the U.S. government if it is unable to meet its debt obligations next month and perhaps even if Congress and the White House are able to reach a deal.

In the past, Moody’s has considered the risk of U.S. default on its debts very low because Congress has routinely approved hikes to the debt limit, but with negotiations between President Barack Obama and congressional Republicans at an impasse, the agency is less confident.

“The current wide divisions between the House of Representatives and the Obama administration over the debt limit creates a high level of uncertainty and causes us to raise our assessment of event risk,” analyst Steven Hess wrote in the report.

But, he said, “We would reduce our assessment of event risk if the government changed its framework for managing government debt to lessen or eliminate that uncertainty.”

Rather than continuing to use the debt ceiling in an effort to keep U.S. borrowing down, the government should look toward Chile, Moody’s suggested. There, “the level of deficits is constrained by a ‘fiscal rule,’ which means the rise in debt is constrained though not technically limited.” Chile is considered to be Latin America’s most fiscally sound country.

And, the report noted, it’s not like the debt ceiling has been effective in keeping U.S. debt down: Congress has in the past raised it often and has not linked it to spending levels.