Moody's: Return of debt limit does not pose risk to US Treasury debt payments

The reinstatement of the statutory limit on the US debt (Aaa, stable) on 16 March does not pose a threat to the US government's ability to service its debt on a timely basis, says Moody's Investors Service, even if the debt ceiling is not raised for a number of months.

In its report "US Debt Limit Will Not Pose a Risk to Debt Payments by the Treasury," Moody's explains that the Treasury cannot borrow to fund the deficit without the debt ceiling being raised. The restriction means that funds available for government operations, including interest payments, will be basically limited to incoming revenues.

The Treasury, however, will be able to use "extraordinary measures" to ensure the government continues to operate. These measures are unlikely to be exhausted until October or November, according to the Congressional Budget Office. After that, the government would need to cut expenditures, but would still be likely to make interest payments on debt, given that the payments equal a small part of expenditures.

When US Secretary of the Treasury Jacob Lew sent a letter to leaders of Congress stating that the statutory debt limit would be reinstated on 16 March, after being suspended in February 2014, he asked for congressional approval to raise the debt limit. Moody's expects the limit to be raised again, although the timing is uncertain.

"The periodic impasse over raising the debt limit is a negative feature of US fiscal management," says Moody's Senior Vice President Steven Hess. "However, even with this feature, the ability to make timely interest payments is intact."