S&P is not the only agency that rates the U.S. The country still gets a AAA rating from Fitch Ratings and Moody’s Investors Service, Wall Street’s other two top agencies. But it would be impossible for the financial markets to ignore the massive downgrade contemplated by S&P.
In one fell swoop, as the result of a mere accident or misstep, the U.S. could go from being the top-rated and most sought after investment in the world to being one of the lowest-rated major economies, a loss of status that almost certainly would make it far more difficult for the U.S. to finance its huge deficits and tarnish the reserve status of the U.S. dollar for decades to come.
That is why the Treasury and various Wall Street institutions have issued such dire warnings about the potentially catastrophic effects from a default, no matter how temporary or minor it may seem to the average American.
Pension funds, mutual funds and other big institutions would be forced to divest their Treasury holdings, in what would be only the beginning of a chaotic reordering of global markets where trillions of dollars of loans and other instruments are backed by Treasury bonds or otherwise tied to benchmark U.S. securities.
Virtually all U.S. interest rates, from 30-year mortgages to credit cards, are linked directly or indirectly to the rates on Treasuries.
The business and financial world has been nearly unanimous in warning political leaders against even a minor or technical default in recent days. Major business groups from the U.S. Chamber of Commerce to the National Retail Federation and National Association of Manufacturers have warned Congress that it must act in time.
In a glimpse of the potential devastation in just one sector, a survey by the Association for Financial Professionals this month found that one-sixth of U.S. corporations currently holding Treasury securities would shift out of most or all of those investments if the debt ceiling isn’t raised in time. Another 36 percent would hold onto their current holdings of Treasuries, but would not purchase these securities going forward.
“Companies are issuing a warning,” said association President Jim Kaitz. “Financial executives see dire consequences to prolonged political theater in Washington and a potential U.S. government default.”
While Standard & Poor’s is being unusually explicit in outlining the consequences of a missed payment by the Treasury, Moody’s Investors Service — which continues to give Treasury a coveted AAA rating — has been unusually silent.
The agency went out on a limb this summer and declared that there was little chance of a downgrade this year because of the nation’s fast-declining budget deficits and the seeming political truce reached between Republicans and Democrats over raising the debt limit at the beginning of the year after they adopted legislation addressing the “fiscal cliff.”
The frantic, last-minute negotations aimed at averting a default give fuel to Moody’s optimism. But even if the Treasury does run out of room for additional borrowing — whether after Oct. 17 or some later date — Moody’s expects it would manage to keep paying interest on the debt at least for a while longer. Without a debt limit increase before Oct. 17, for example, Moody’s calculates that the big crunch wouldn’t come until Nov. 15, when the Treasury has an unusually large interest payment of $31 billion coming due and likely would not have enough cash on hand to make it.
Moody’s optimism also is based on the assumption that the Treasury would withhold payment on other U.S. obligations, such as paying Social Security, Medicare and veterans benefits, so it can conserve cash and honor its debt payments. The Treasury has denied it has authority to pay some obligations but not others that come due. Mr. Lew testified that essentially all the government’s obligation are “at risk” once it runs out of borrowing authority.
Some Wall Street analysts question Moody’s sunny outlook, noting that the agency also seemed confident earlier this month that a government shutdown either would not occur or would be short-lived. They say the credit gurus appear to have been taken by surprise by the intensity and length of the latest impasse, raising the possibility that global markets could be shaken violently by a sudden and unexpected downgrade by Moody’s, S&P or Fitch once they are jolted back to reality.
If Moody’s is being complacent about the potential for a prolonged political impasse or slip-ups at the Treasury, it is not the only one on Wall Street.
“I don’t buy the Armageddon talk,” said Christopher Mahoney, a retired Wall Street banker who once worked for Moody’s and whose sentiments are widely shared among investors. He and other investors are soothed by House Speaker John Boehner’s repeated assurances that he will not allow the nation to default.