No direct connection between US debt limit, default: Moody's

There is no direct connection between the debt limit and a default by the U.S. government, said ratings agency Moody's Investors Services on Monday.

"The U.S. government would continue to pay interest and principal on its debt even in the event that the debt limit is not raised, leaving its credit worthiness intact," Moody's said in a report.

The U.S. federal government has been shut down since Oct. 1, as Republicans and Democrats failed to pass government funding bills for its 2014 fiscal year.

And Oct. 17 is the next crucial deadline, the last day that the U.S. Treasury Department estimates that the federal government is certain to have enough money to pay its bills.

The U.S. government reached its statutory debt limit of 16.7 trillion U.S. dollars in May. Since then, it has been using "extraordinary measures" to raise funds and pay government expenditures. But on Oct. 17, the government will be left with only 30 billion dollars of cash on hand, whereas its daily payments can run up to 60 billion dollars.

Moody's explained that the debt limit restricts government expenditures to the amount of its incoming revenues, and it does not prohibit the government from servicing its debt.

If the borrowing limit is not raised before Oct. 17, the government will have to prioritize among its expenditures.8 "In our view, the government is very likely to prioritize interest payments because of the potentially serious effects a default would have on financial markets in the U.S. and globally," Moody's said in the report.

The ratings agency noted that interest payments on Treasury bonds and notes are due twice a month, on the 15th and the last day of every month. After Oct. 17, the first interest payment date is Oct. 31, when a relatively small 5.9 billion dollars is due.

"Thus, a Treasury bond default is not technically possible until that date (Oct. 31)," Moody's said. "Moreover, given that the amount that needs to be paid is relatively small, a default is also extremely unlikely."

Regarding the lingering government shutdown, Moody's said, "The shutdown prohibits discretionary spending, but not mandatory spending or debt services, such as interest and principal on Treasury securities, which the U.S. government will continue to be able to pay."