- The Washington Times - Sunday, July 17, 2011

While Congress and the White House still have more than two weeks to raise the debt ceiling before the Treasury Department’s early August deadline, the financial markets are getting jittery, fearing they won’t reach a deal in time.

“They’re starting to get spooked,” said Ward McCarthy, chief financial economist at Jefferies & Co.

Two major rating agencies have warned that the government’s credit rating could be downgraded if, by Aug. 2, it fails to increase its $14.29 trillion debt ceiling — the nation’s legal limit on how much it can borrow. Treasury says failing to do so would cause the suspension of some of its debt payments, a scenario experts say could lead to a major financial crisis.

And while the financial markets generally have been steady in recent days, Wall Street hasn’t overflowed with bullish confidence either.

“With the credit agencies beating a drum in the background, the parallels of certain parts of Europe are beginning to become somewhat disconcerting” to investors, Mr. McCarthy said.

Negotiations between Democrats and Republicans to raise the debt ceiling have been stalled for months. Republicans have insisted such action be coupled with significant spending cuts and no tax increases. Democrats say they are OK with some spending cuts but also want to raise taxes on corporations and wealthy individuals.

President Obama, who has been meeting congressional leaders to try to hammer out a compromise, has said he wants a deal by Friday in order to avoid a possible downturn in the financial markets.

Mark Zandi, chief economist at Moody’s Analytics, said that while he doesn’t characterize the markets as “spooked,” there is “growing unease” on Wall Street about the delay in Congress to raise the debt limit.

“It’s not a reason to sell stocks or bonds, but it surely is a reason not to buy,” he said. “There are stress lines developing.”

Mr. Zandi said as each day passes without an agreement, “those stress lines will turn into fissures and ultimately cracks.”

“It’s one of those things that the markets are OK until they’re not, and there’s no telling what the catalyst will be,” he said. “And when it happens, it will be very rapid and very significant.”

The House this week is poised to vote on the Republican “cut, cap and balance” proposal, which would immediately cut federal spending, cap it going forward and call for a balanced-budget amendment to the Constitution.

Senate Republicans on Sunday voiced support for the plan.

“The real deal to limit spending and get us in balance would be an amendment to our Constitution. Without that we’re just going to talk to each other and run America into the ground,” Sen. Lindsey Graham, South Carolina Republican, said on CNN’s “State of the Union.”

Mr. Obama and Senate Democrats have criticized the proposal, and Republicans admit the amendment, which must be ratified by three-fourths of the states, wouldn’t be implemented until years from now.

Senate Minority Leader Mitch McConnell has proposed a backup plan that would increase the debt ceiling while getting more than $1 trillion in spending cuts, but that proposal is unpopular among House Republicans.

Speaking on “Fox News Sunday,” Rep. Jim Jordan, Ohio Republican, called it a “cop out,” and Rep. Chris Van Hollen, Maryland Democrat, said it would be “a political answer, not a real answer to the problem.”

Failure by Congress to raise the debt limit would cause turmoil on Wall Street that would reverberate throughout the economy, according to analysts.

“It literally would be the end of the financial markets as we now know them,” Mr. McCarthy said. “It would cause secondary effects that we probably can’t even envision ahead of time.”

Moody’s Investors Service last week threatened to lower the federal government’s AAA bond rating because debt limit talks between Congress and the White House are running out of time.

Credit rating agency Standard & Poor’s also has warned of a 50 percent chance it will downgrade the government’s credit rating within three months because of the impasse.

A downgrade would lead to higher interest rates on U.S. Treasury bonds, increasing the interest paid by U.S. taxpayers. It also would push up rates for mortgages, car loans and other debts, which are linked to Treasury rates.

“This is a reminder that the deadline for these negotiations may not be as far away as Aug. 2 or even July 22,” said Sen. Charles E. Schumer, New York Democrat. “It’s whenever the credit markets decide it is.”

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