- 40 Australian adults, children found in ‘one of the worst accounts of incest ever made public’
- Venezuela’s Maduro calls on student ‘price vigilantes’ to hit the streets, report businesses
- Atheists smug as Hindus join Satanists to demand display at Oklahoma Statehouse
- Bow before Valkyrie, NASA’s ‘superhero robot’ entry in DARPA challenge
- 10-year-old Pennsylvania boy suspended for pretend bow-and-arrow shooting
- Tea partiers turn on Capitol Hill budget deal
- Budget deal to get quick vote in the House
- Comma on!: Twitter erupts over Obama-Castro ‘marriage’
- Sebelius calls for review of Obamacare rollout woes
- American dream dying, but many see free market as solution: Poll
Next move on U.S. credit rating? ‘D’ for default
S&P warns of dire consequences
Despite expressing confidence that the U.S. will avoid a default, one top credit rating agency has issued a quiet warning that the nation’s AA+ rating will plunge suddenly to a shockingly low D if a political resolution does not come in time to prevent the Treasury from missing a debt payment in the next month.
Standard & Poor’s Corp., the oldest Wall Street rating firm and the same one that previously triggered a global market rout in August 2011 by being the first to downgrade the U.S. from AAA, is now saying the next step for the U.S. will not be another minor notch down, as occurred last time, but rather be more like falling off the cliff altogether.
Its casual and unpublicized warning, buried deep in an explainer on the government shutdown, underscores how unexpected and even unthinkable dangers lurk in the background as the Congress and the White House flirt with allowing the Treasury to run out of borrowing room this week.
Various proposals to forestall default at least for a few weeks have emerged in Congress, though none appears to have the votes to pass. The fervent last-minute efforts by congressional leaders ahead of Thursday’s “drop dead” deadline laid down by the Treasury illustrate why S&P and other rating agencies say they are confident that the Treasury will be rescued from default through an eleventh-hour deal.
But any short-term deal would only postpone the day of reckoning on the debt while setting up another deadline and likely political confrontation later this year or next.
S&P’s quiet warning likely influenced the administration and lawmakers to finally start negotiations on Friday. Markets reacted violently to S&P’s first, more minor downgrade in 2011, with the Dow Jones industrial average plummeting by more than 1,000 points. The wholesale collapse of the U.S. rating being suggested by S&P this time around, after earning what was once the highest rating of any government on Earth, is not something most investors have prepared for or even contemplated could ever happen.
But the Treasury and many analysts are pointing out that the margin for error grows so thin once the Treasury exhausts its borrowing authority that a minor mistake or miscalculation by Congress or Treasury’s bean-counters — say on figuring how much cash they have on hand to make a scheduled debt payment — could plunge the nation into an accidental slip-up with calamitous consequences for the global economy and financial markets.
Treasury Secretary Jack Lew highlighted the potential for a monumental miscalculation, one that could be precipitated by outside investors, in testimony before Congress on Thursday. He noted that even when the Treasury has exhausted its authority to borrow above the current limit, it must continue to roll over or refinance $100 billion of existing U.S. Treasury bills each week.
“We are relying on investors from all over the world to continue to hold U.S. bonds,” he said. Nations such as China and Japan are given the opportunity to keep buying bonds each week, but they also may choose to sell them. Already some investors are starting to shun them out of concern about a default, causing the rates on short-term notes to rise. “If U.S. bond holders decided that they wanted to be repaid rather than continuing to roll over their Treasury investments, we could unexpectedly dissipate our entire cash balance” and be forced into default within days, Mr. Lew said.
“Make no mistake — unintended consequences do occur and much more frequently than most are willing to admit,” said investment analyst Joseph Stuber, who thinks the odds of the U.S. stumbling into a default are high. “Recessions are almost always caused by miscalculations on the consequence of a particular policy and/or regulatory action/blunder.”
S&P’s warning fuels the worst fears. The agency has not issued a formal warning of a downgrade, as it says the current impasse has a 2-in-3 chance of being resolved at the last minute like previous ones, in time to permit timely payments by the Treasury.
But should the 1-in-3 chance of a U.S. default actually occur, S&P credit analyst Marie Cavanaugh stressed that the Treasury will be treated like any other bond issuer and will not be accorded any special treatment despite the U.S. status as the pre-eminent global bond market and safe haven for investments for nearly a century.
“Should the government fail to service a debt obligation, we would lower the sovereign rating to ‘SD’ [selective default],” she said, adding that such a sharp downgrade would not be temporary and most likely would lead to a permanent and severe downsizing of U.S. credit prospects. “The rating would remain at ‘SD’ until the default is cured, which may occur when delinquent principal and interest payments are paid in full,” she said. Thereafter, the S&P usually gives any governments that have gone into default junk ratings in the CCC+ to B range, although she suggested the U.S. rating might be somewhat higher because the default likely would occur for political reasons, rather than the usual financial ones.
Loss of status looms
© Copyright 2013 The Washington Times, LLC. Click here for reprint permission.
About the Author
- Inconvenient truth: China, developing world now biggest source of greenhouse gases
- U.S. unemployment falls to five-year low of 7 percent; 203K jobs added
- Economic growth jumped to 3.6 percent in summer
- Spending on social welfare rose as economy tanked during recession
- Treasury aims to sell off GM stock by end of year
Latest Blog Entries
By Donald Lambro
Growth spikes are little more than trend-free anomalies
- Teen thugs in DC run wild -- even while wearing GPS ankle bracelets
- Leon Panetta named as source of 'Zero Dark Thirty' scriptwriters information
- New budget accord saves $23 billion -- after $65 billion spending spree
- Obama takes 'selfie' at Mandela's funeral service
- CARSON: Why did the founders give us the Second Amendment?
- VEGAS RULES: Harry Reid pushed feds to change ruling for casino's big-money foreigners
- Tea partiers turn on Capitol Hill budget deal
- Gov't Motors: Obama fudges math on auto bailout, $10.5 billion loss for taxpayers
- More than a quarter million sign up for Obamacare in November
- Chinese man fed up with his girlfriend's shopping jumps to his death
Independent voices from the The Washington Times Communities
All of the world’s problems, solved on your back porch
Human interest stories to feed interest, satisfy curiosity and see outside the box.
Politics, economics, and business from a real world perspective.
White House pets gone wild!
Let it snow