American financial markets were unnerved yesterday by the news that Moody's credit rating agency might downgrade a chunk of the US government's Treasury bonds. The benchmark 30-year Treasury bond lost more than a point, while the Dow Jones industrials index finished 26 points lower at 5,216.8.
Moody's vice-president, Vincent Truglia, said the growing danger of a default on its debt by the Federal government meant there was a 50 per cent chance that the agency would cut the triple-A rating of $387bn worth of Treasury bonds falling due on 29 February and 1 April. It is the first time Moody's has ever taken any negative rating action on US Treasury bonds.
Mr Truglia said Moody's had taken the Treasury at its word when it said no special measures would be available to make payments on its debt if Congress did not extend the government's $4,900bn debt ceiling by 1 March.
The move follows a statement by Standard & Poor's earlier this week that even a temporary default would take Treasury bonds from their current triple-A to the lowest possible single-D rating. In November, the London- based rating agency IBCA placed the US on a "rating watch".
Financial markets do not believe the US will default, and have been concentrating more on the likelihood of an interest rate cut next week. However, Moody's unprecedented action had politicians rushing out their reassurances.
Robert Rubin, Treasury Secretary, said he was confident Congress would pass a straightforward extension of the debt ceiling. "I'm absolutely confident that this nation will not default on its obligations for the first time in its history." He added that Moody's had helped focus attention on the problem.
Newt Gingrich, Republican Speaker of the House of Representatives, said he had had a "good talk" with President Bill Clinton. "We took a big step towards solving the debt ceiling problem," he said.
The debt ceiling has been the Republicans' lever for trying to extract concessions in negotiations over how to balance the Federal Government deficit. The total amount of Treasury bonds outstanding is $2,300bn.