DBRS Places United States Ratings Under Review with Negative Implications

DBRS, Inc. (DBRS) has today placed the United States of America’s long- and short-term foreign and local currency debt ratings Under Review with Negative Implications. DBRS rates the United States’ long-term foreign and local currency debt AAA, and its short-term foreign and local currency debt R-1 (high).

This action reflects the growing risk of a selective default by the federal government on its debt securities as a result of the lack of an agreement to raise the statutory limit on federal debt (the debt ceiling). According to the U.S. Treasury, its ability to borrow will be exhausted no later than October 17, 2013, leaving a cash balance of approximately $30 billion. If the debt ceiling is not raised or eliminated by October 17, it is unclear how the Treasury would operate. While a low probability, missing payments on selected government securities cannot be ruled out. In the view of DBRS, the longer it takes for an agreement to be reached on the debt ceiling, the greater the risk of missed payments.

The review for downgrade reflects the increasing uncertainty over the debt ceiling outcome, combined with the potential lingering repercussions on both domestic and international investor sentiment, and therefore the U.S. economy and financial markets. DBRS notes that the magnitude of these repercussions could increase each day this impasse continues.

If by October 17 there is still no agreement to raise the debt ceiling and the United States subsequently misses a debt payment, DBRS would assign a Selective Default rating to the affected securities, as long as we expect the Treasury to meet its other obligations in a timely manner. If there is a full-fledged default involving a wide array of securities, the magnitude of the downgrade would be greater.

Notes:
The principal applicable methodology is Rating Sovereign Governments, which can be found on the DBRS website under Methodologies. The principal applicable rating policies are Commercial Paper and Short-Term Debt, and Short-Term and Long-Term Rating Relationships, which can be found on the DBRS website under Rating Scales.

The sources of information used for this rating are the U.S. Treasury, the Congressional Budget Office, Federal Reserve, Office of Management and Budget, Bureau of Economic Analysis, Bureau of Labor Statistics, International Monetary Fund, World Bank, DBRS. DBRS considers the information available to it for the purposes of providing these ratings was of satisfactory quality.

These ratings are endorsed by DBRS Ratings Limited for use in the European Union.

For further information on DBRS’ historic default rates published by the European Securities and Markets Administration (“ESMA”) in a central repository see http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.

Generally, the conditions that lead to the assignment of a Negative or Positive Trend are resolved within a twelve month period while reviews are generally resolved within 90 days. DBRS’s trends and ratings are under constant surveillance.

Lead Analyst: Fergus McCormick
Rating Committee Chair: Alan G. Reid
Initial Rating Date: September 8, 2011
Most Recent Rating Update: October 11, 2012

For additional information on this rating, please refer to the linking document under Related Research.