The Two-Way
1:27 pm
Mon July 18, 2011

Moody's: U.S. Should Consider Getting Rid Of Debt Ceiling

Last week, Moody's Investor Service became the first of the big three rating agency's to put the United States' credit rating on watch for possible downgrade. Today, it suggests that the country should save itself further headaches by getting rid of the debt ceiling altogether.

Fox Business reports:

In a new report that says the debt ceiling creates "periodic uncertainty" is an intriguing line: "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. We would reduce our assessment of event risk if the government changed its framework for managing government debt to lessen or eliminate that uncertainty."

Translation: Moody's is asking the U.S. government to toss the limit, and instead have a framework based on the size of the total budget to keep borrowing in check.

Reuters reports that the United States is one of the few countries in the world that sets a debt ceiling. The Congressional Research service provides a bit of history on how it came to be in this paper. The short of it is that some form of a debt ceiling has existed since 1917, after the passing of the Second Liberty Bond Act, which helped finance U.S. involvement in World War I.

"In the words of one author, the debt limit 'expresses a national devotion to the idea of thrift and to economical management of the fiscal affairs of the government,'" the report adds.

In its report, says Reuters, Moody's suggests that the U.S. should move in the direction of other countries, which constrain but don't "technically" limit national debt.

Reuters adds:

It also cited the example of the Maastricht criteria in Europe, which determines that the ratio of government debt to GDP should not exceed 60 percent. It noted, however, that such a rule is often breached by the governments.

In the United States, Moody's said the debt limit had not effectively curbed the rise in government debt because lawmakers regularly raise it and because that limit is not related to the level of expenditures approved by Congress.

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