What A Credit Ratings Cut Could Mean For The U.S.

Audio for this story from All Things Considered will be available at approx. 7:00 p.m. ET

 
Traders work on the floor of the New York Stock Exchange in April. The country's credit rating could suffer if Congress fails to address the nation's long-term debt.
Enlarge Spencer Platt/Getty Images

Traders work on the floor of the New York Stock Exchange in April. The country's credit rating could suffer if Congress fails to address the nation's long-term debt.

text size A A A

July 26, 2011

With a debt ceiling deadline approaching, party leaders spent the day counting votes.

There are two plans: One, the handiwork of House Majority Leader John Boehner (R-OH), the other from Senate Majority Leader Harry Reid (D-NV).

The problem is that it's not clear that either can muster the votes necessary for approval.

On Monday night, President Obama dramatized the threat this way:

"For the first time in history, our country's triple-A credit rating would be downgraded, leaving investors around the world to wonder whether the United States is still a good bet," he said. "Interest rates would skyrocket on credit cards, on mortgages and on car loans."

But it's not clear how big of a problem a credit downgrade would be.

There's no debate that if the U.S. defaults on its debt, it will be a big deal. But whether it will be as catastrophic as the administration says depends on how markets react.

However, there's little doubt that a default would be very costly.

A Public Relations Issue

And what if it's just a downgrade? The government's borrowing costs would probably go up. But some experts say a downgrade is primarily a public relations issue.

"Not meaningless, because it's sort of a nice focus for the press, but it just isn't a big financial deal," says Joseph Gagnon, an economist at the Peterson Institute. He says what matters far more is how we arrive at that downgrade.

I would not be at all surprised if someone at Treasury was talking to rating agencies and saying, 'Well, what do you need? What do we need to avoid a downgrade? Minimum of what? How much deficit reduction?' I would be very surprised if they weren't talking to them about that.

Let's say there's still a stalemate, and though there's no default, the government runs out of cash to pay its workers, contractors and Social Security benefits. That, Gagnon says, could trigger another recession.

But ratings agencies are also warning of a downgrade even if Congress raises the debt ceiling, if it doesn't also address long-term deficits. Gagnon says the economic impact of that kind of downgrade could easily be a non-event.

"You know, oftentimes, the rating agencies are behind the curve, and this is certainly the case now — where the rating agencies don't have any additional information that everyone else in the market has already," he says.

Japan's sovereign debt rating was cut in 2002, and he says there wasn't a big effect.

It turns out, this opinion is shared by Standard & Poor's itself. In a series of reports published last week, the ratings agency assessed the likely impact of a potential downgrade. It said, in short, that it wouldn't have much of an impact.

In fact, some say given the financial situation in the U.S. it probably should have happened a long time ago.

"I would have downgraded them 10 years ago," says Kent Smetters, a former Treasury official and now a professor at the Wharton School.

'The Guts To Compromise'

Smetters says that for many years he's believed that interest, Social Security and medical entitlement payments were going to rise unsustainably, leading us to this point. And what's really lost if U.S. credit gets downgraded is any credibility that politicians on both sides have the guts to compromise.

"For me, the downgrade reflects something bigger than that," he says. "It's a statement that basically says to the world, 'It's not even obvious that we're serious about dealing with the longer term problems.'"

But politicians like to suggest the country's credit rating has close ties to consumers' credit.

"I think that is a way of trying to get the voter base into action, but it's not going to have as dramatic of an impact on mortgages and credit card rates," Smetters says.

That's not to say a rating cut won't look bad.

"I would not be at all surprised if someone at Treasury was talking to the rating agencies and saying, 'Well, what do you need? What do we need to avoid a downgrade? Minimum of what? How much deficit reduction?' " says the Peterson Institute's Gagnon. "I would be very surprised if they weren't talking to them and trying to get that."

Because if you can avoid both economic and public relations fallout, why wouldn't you?

Views: 25

Reply to This

Replies to This Discussion

Electioneering drama - it will blow over.

 

Like the guy says - the rating should have been cut years ago. 

Calm down. The US will not miss a coupon payment on its $14.3tn debt next Wednesday.

A genuine default would be “Lehman on Steroids” in the words of Ex-Treasury secretary Larry Summers. Precisely for that reason President Obama will not pull the trigger, EVEN IF the debt ceiling talks break down in acrimony.

Obama still has a clutch of cards to play, in extremis. As Yves Smith from Naked Capitalism argues, the White House can challenge the constitutionality of the debt ceiling in Congress.

The 14th Amendment of the Constitution states that the “validity of the public debt of the United States shall not be questioned”.

 

http://blogs.telegraph.co.uk/finance/ambroseevans-pritchard/1000110...

I liked this one, Winston Churchill in its downgrade warning that “you can always count on Americans to do the right thing after they’ve tried everything else.”

Nope. We don't deserve a good credit rating. This is what happens to a nation when you let a private foreign entity control your monetary system. I would rather see it fold and lower my living standards than continue on this path.

The game is rigged.... and the outcome is predictable. 

RSS

"Destroying the New World Order"

TOP CONTENT THIS WEEK

THANK YOU FOR SUPPORTING THE SITE!

mobile page

12160.info/m

12160 Administrators

 

Latest Activity

Doc Vega posted blog posts
17 hours ago
cheeki kea commented on cheeki kea's photo
Thumbnail

Waste runs deep

"One things for sure if the Trump train turns up at your station it won't be there for a joy…"
yesterday
cheeki kea posted photos
yesterday
cheeki kea commented on tjdavis's blog post Law & Disorder Soros Report
"The report is a great expose' it's a long but good practice and insight for what ever…"
yesterday
Doc Vega favorited tjdavis's blog post Law & Disorder Soros Report
yesterday
Doc Vega commented on tjdavis's blog post Law & Disorder Soros Report
"We know all these things from sound bytes and bits and pieces of articles but to read something…"
yesterday
cheeki kea favorited tjdavis's blog post Law & Disorder Soros Report
Monday
tjdavis posted a blog post
Sunday
tjdavis posted a video

The Coup - "The Guillotine"

"The Guillotine" by The Coup from the new album 'Sorry To Bother You,' out nowProduced and Directed by Beau Patrick CoulonDP & Edit - Shawn ButcherAC - Danie...
Sunday
Doc Vega posted blog posts
Friday
cheeki kea posted a blog post
Friday
Less Prone favorited GeneralCarlosQ17's blog post Reuters was paid millions of dollars by the US government for “large scale social deception”
Friday
cheeki kea favorited GeneralCarlosQ17's blog post Reuters was paid millions of dollars by the US government for “large scale social deception”
Friday
tjdavis posted photos
Friday
tjdavis posted a blog post
Friday
GeneralCarlosQ17 posted a status
"#DOGE - A Lawyer's Perspective - Tom Renz’s Newsletter https://substack.com/home/post/p-156562663"
Thursday
GeneralCarlosQ17 posted a status
"**DOGE IS LIVE!! Work | DOGE: Department of Government Efficiency https://doge.gov/"
Thursday
Doc Vega posted a blog post

What Would Have Happened to the US Had Harris Been Elected?

Dodging a bullet! America avoided an extinction event that would have been just as bad as any…See More
Thursday
GeneralCarlosQ17 posted a blog post

Reuters was paid millions of dollars by the US government for “large scale social deception”

Reuters was paid millions of dollars by the US government for “large scale social deception”. That…See More
Feb 13
tjdavis posted a video

Sci-Fi Short Film “Slaughterbots” | DUST

In a dystopian world a new form of A.I. weaponry has been created. All these drone bots need is a profile: age, sex, fitness, uniform, and ethnicity. Nuclear...
Feb 12

© 2025   Created by truth.   Powered by

Badges  |  Report an Issue  |  Terms of Service

content and site copyright 12160.info 2007-2019 - all rights reserved. unless otherwise noted