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Moody's potential downgrade of US would impact GSEs

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Moody's Investors Service placed the triple-A bond rating of the U.S. government on review for possible downgrade. The credit ratings agency also placed on review for possible downgrade the triple-A ratings of financial institutions directly linked to the U.S. government, namely the government-sponsored enterprises Fannie Mae and Freddie Mac. The bonds the GSEs issue, however, will not be impacted by any downgrade as Moody's does not rate those securities. "However, we have rated about $12 billion of U.S. Resecuritizations backed by residential mortgage-backed securities (RMBS) transactions that have exposure to these entities," said Moody's. "More than half of the exposure ($6.4 billion) is directly linked because these securities have an implicit guarantee from the GSEs. As a result, the ratings of these securities will move in lock-step with the U.S. government’s rating and have been placed on review for possible downgrade," it said. Approximately $5.5 billion of triple-A rated RMBS securities are also linked to the U.S. government rating because they benefit from insurance provided by the HUD or the VA. On June 2, Moody's announced that a rating review would be likely in mid July barring progress in negotiations to raise the debt limit, Moody's said in a statement. Until then, "there is a small but rising risk of a short-lived default." The downgrade, likely to double-A, would also apply to the Federal Home Loan Banks, and the Federal Farm Credit Banks. "To retain a stable outlook, such an agreement (on the debt ceiling) should include a deficit trajectory that leads to stabilization and then decline in the ratios of federal government debt to GDP and debt to revenue beginning within the next few years," the report said. Structured finance securities that hold government-linked debt as their primary collateral have also been placed on review for downgrade, Moody's report states. Write to Jacob Gaffney. Follow him on Twitter @jacobgaffney.

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