Credit agencies warn about debt-payment delay

With signs multiplying that debt-reduction talks between the White House and Congress are at an impasse, Wall Street credit agencies are stepping up their warnings that even a temporary delay in making payment on the government’s $14.3 trillion of debt will result in a significant cut in the nation’s perfect credit rating.

In unusually frank statements about the consequences of congressional inaction last week, Moody’s Investors Service said it anticipates a cut from AAA to AA if the impasse leads to even a brief suspension of debt payments after the Treasury effectively reaches its borrowing limit Aug. 2. And Standard & Poor’s warned that it would go further and plunge the U.S. rating to the lowest possible rung — a “D” for default.

“If any government doesn’t pay its debt on time, the rating of that government goes to D,” said John Chambers, managing director of sovereign ratings at S&P, in an interview with Bloomberg Television.

But he quickly added that because of that very real consequence of default, among others, he expects the dramatics and disagreements over the debt limit will ultimately be resolved in time and that Congress will once again raise the nation’s borrowing limit as it has 78 times before since 1960 — “often at the last minute.”

A junk rating of D would make it impossible for the U.S. to finance its debt, much less add more on top of it, since the world’s major pension and investments funds generally are not allowed to invest in debt rated that low. Few other funds — even China’s vaulted $3 trillion of foreign-exchange reserves — have enough money to absorb the mammoth amounts of debt issued by the U.S.

But even a lesser cut in the credit rating such as that envisioned by Moody’s would force the government to pay higher interest rates on Treasury bonds and notes.

Currently, the U.S. pays an extremely low 3 percent rate on average on its debt. At the current rate of borrowing, the nearly $200 billion tab in interest paid by taxpayers this year is due to rise to nearly $500 billion within four years — assuming the U.S. keeps its AAA credit rating, according to the Congressional Budget Office. The tab would be substantially higher if rates go higher.

As Treasury rates rise, so would the rates on nearly every other kind of U.S. loan, including most mortgages, credit cards, consumer and business loans, whose rates typically are linked to Treasuries. Economists say such an across-the-board shock in borrowing rates has the potential to derail a fragile recovery that has failed to take off this year even with record-low interest rates.

Beth Ann Bovino, S&P economist, said she expects interest rates to rise by nearly a full percentage point by the end of 2012 just based on the onslaught of borrowing scheduled by Treasury in the next year, even if it maintains its top credit rating.

“But if Congress cannot reach an agreement on how to manage the debt, the results would be disastrous worldwide,” she said, with the possibility of a debt crisis breaking out in the U.S. like the one in Europe that has sent interest rates in the most heavily indebted countries to double-digit levels.

“Interest rates would jump for new bonds, as they have in Greece, Portugal and other heavily indebted nations,” she said. “An increase in rates would put a halt to the fragile recovery by choking off credit to businesses and households.”

In holding out the threat of an imminent and potentially devastating downgrade, some critics say the ratings agencies may be trying to get even with U.S. legislators who severely criticized them for failing to warn investors about the dangers of subprime mortgage securities before a crisis broke out in 2007 and 2008.

Federal authorities have been investigating whether their failure to act at that time constituted civil fraud.

But other financial experts say the ratings agencies have been too slow to warn of the dangers of debt and deficits in the U.S. that, as a percentage over the overall economy, currently rival the size of the most troubled countries in Europe. In fact, less well-known credit agencies in China and Germany already have lowered their ratings on Treasury debt, and Florida-based Weiss Ratings gives Treasury only a middling C grade.

Weiss says it didn’t give the U.S. a lower rating, despite its poor management of deficits and debt in recent years, because of two offsetting strengths: its large and strong economy, and the reserve currency status of the U.S. dollar, which enables the country to borrow more than other countries at lower interest rates.

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