Fear of downgrade spreads around capital
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Driving the news today is what Politico says is worrying Congress and the President more than default: a credit rating downgrade. For a while conventional wisdom was that if Congressional leaders could muster an agreement to raise the debt ceiling, the U.S. would maintain its AAA rating. But Standard & Poor’s is reiterating its stance that even if a debt ceiling increase is passed, the U.S. could still lose its prized rating.
[W]hat really haunts the administration is the very real prospect, stoked two weeks ago by Standard & Poor’s, that Barack Obama could go down in history as the president who presided over his country’s loss of its gold-plated, triple-A bond rating.
It would be a psychic blow to a nation that already looks over its shoulder at rising economic powers like China and wonders, what’s gone wrong?
It’s what drives his Treasury Department into cajoling and pleading with the bond ratings agencies to be patient, like a harried coach working the refs from the sidelines.
David Beers, managing director of sovereign credit ratings at Standard & Poor’s, explains why a decision on a downgrade doesn’t hinge on the debt ceiling talks: “For us, the issue is not the debt limit — it’s the underlying fiscal dynamics. It’s not obvious to us that this political divide that is proving so difficult to bridge is going to be any more bridgeable three months from now or six months from now or a year from now.“
So what’s at stake in all this? A downgrade could send ripples throughout the nation’s economy. According to the Los Angeles Times:
The more likely scenario that investors are preparing for is that a temporary deal is struck to lift the debt ceiling. But such a makeshift plan is unlikely to allow the U.S. to maintain its AAA grade with bond rating companies. Citigroup analysts say the odds are 50-50 that the U.S. will be demoted to an AA rating for the first time ever.
Such a downgrade could lead to a temporary market panic. In the longer term it could push interest rates up for everyone from bankers down to ordinary people taking out car loans, and weaken the dollar’s position as the world’s reserve currency.
Increased borrowing costs for the government could amount to an additional $100 billion a year according to some experts – a cost that will ultimately be passed onto taxpayers. Furthermore, states and municipalities, already in dire straights, will be forced to pay more for credit.
All this comes as Standard & Poor’s and Moody’s executives testify on Capitol Hill today. Stay tuned to Bankrupting America for the latest developments in the debt ceiling saga.