With US Credit Rating Under Review, Contingency Plans Emerge

As elected officials continue to wrangle over raising the debt ceiling, Moody’s announced it would review the U.S’s triple-A rating for a possible downgrade.

In a statement, the rating agency said it would review Washington’s status because of “the rising possibility that the statutory debt limit will not be raised on a timely basis, leading to a default on US Treasury debt obligations.”

It said the risk of a U.S. default was “low but no longer to be de minimis.”

In conjunction with this action, Moody’s will also review for possible downgrade the AAA ratings of financial institutions directly linked to the US government including Fannie Mae, Freddie Mac, the Federal Home Loan Banks, and the Federal Farm Credit Banks; as well as securities either guaranteed by, backed by collateral securities issued by, or otherwise directly linked to the US government or the affected financial institutions.

Financial institutions are beginning to position themselves should the U.S.’s AAA-debt rating be undermined. The Financial Times recently reported that some Wall Street giants are preparing to cut their use of U.S. Treasuries in favor of cash on hand as a precaution.

Treasuries play a key role in the functioning of financial markets, including repos, futures and swap markets.

Northwest credit unions also hold significant amounts of government debt. Credit unions often use them to generate better rates for their members by investing spare cash in agency debt.

Credit unions must be prepared should ratings agencies downgrade the U.S. rating. In June, Moody’s warned that it would review Washington’s credit worthiness, while Treasury Secretary Tim Geithner has urged Congress to act before the August 2 deadline.

OnPoint CCU’s Senior Vice President/Chief Financial Officer Jim Hunt said, “We continue to believe that U.S. securities are still the safest though.”

“We do have limits on holding investments below AAA, however, we specifically allow U.S. government and agency securities without limits,” he added. “So assuming the NCUA does not make changes regarding investment in U.S. government securities, we feel our policies adequately address this risk and allow us to operate in our existing capacity.”

 “If the NCUA did changed its stance on U.S. debt, it would have a material impact,”

Federal, Oregon, and Washington laws do not explicitly require credit unions to dump their treasury holdings should U.S. debt be downgraded or reviewed. However, there is an implicit assumption throughout that the U.S. government has a strong credit rating.

 Debt ceiling talks have become more acrimonious of late with both parties posturing for public opinion—both as a negotiating tactic and in the event no deal is reached.

Treasury rates rose to a yearly high early because of the cantankerous debt negotiations in Washington. They have since dropped down again because of continuing worries over Europe’s sovereign debt crisis.

 

Questions? Contact the Communications Department: 206.340.4815, Editor@nwcua.org.

Posted in Economy, Federal.