Credit agen­cies is­sue warn­ings on debt-pay de­lay

The Washington Times Weekly - - Politics - BY PA­TRICE HILL

With signs mul­ti­ply­ing that deb­tre­duc­tion 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, 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 mor tgages, credit cards, con­sumer and busi­ness loans, whose rates typ­i­cally are linked to Trea­suries. Econ­o­mists say such an across-the­board 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 dou­bledigit 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 Florid­abased 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.

In­de­pen­dent ex­perts rang­ing from Fed­eral Re­serve Chair­man Ben S. Bernanke to for­mer Fed Chair­man Alan Greenspan and the In­ter­na­tional Mon­e­tary Fund also have raised dire sce­nar­ios about a debt cri­sis that could be only a month away, given the cur­rent im­passe.

Ac­cord­ing to Trea­sury’s cal­cu­la­tions, Congress must have passed an in­crease in bor­row­ing au­thor­ity by Aug. 2 to avoid the pos­si­bil­ity of de­fault. But be­cause of the many con­di­tions that Repub­li­can leg­is­la­tors are at­tach­ing to in­creas­ing the debt, gen­er­ally re­quir­ing equal or greater cuts in spend­ing and no tax in­creases, leg­isla­tive aides said an agree­ment must be forged by July 22, to al­low time for votes in the House and Se­nate and beat that dead­line.

“A debt de­fault in the U.S. gov­ern­ment debt mar­ket would have very se­ri­ous, far-reach­ing, dra­matic reper­cus­sions, and that’s why we’re con­fi­dent that it will be avoided,” said John Lip-

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.

sky, the IMF’s acting man­ag­ing di­rec­tor, on June 29.

But he warned against even a lesser mis­step, say­ing that “a loss of fis­cal cred­i­bil­ity could cause an in­crease in in­ter­est rates or even po­ten­tially a sov­er­eign down­grade, and that would have sig­nif­i­cant reper­cus­sions here and else­where.”

Ac­cord­ing to the rat­ing agen­cies and other Wall Street an­a­lysts, the stakes go far be­yond just how eas­ily and cheaply U.S. cit­i­zens, Congress and Trea­sury can bor­row in the fu­ture.

They say a large swath of the U.S. econ­omy and fi­nan­cial mar­kets also would be shaken even by a rel­a­tively small down­grade of the U.S. gov­ern­ment be­cause it would trig­ger a cas­cade of credit down­grades on other vi­tal in­sti­tu­tions.

Among the pil­lars of the econ­omy whose credit rat­ings would be threat­ened are nu­mer­ous state and lo­cal gov­ern­ments, ma­jor banks, mort­gage gi­ants Fan­nie Mae and Fred­die Mac, the Fed­eral Home Loan Banks and Fed­eral Farm Credit Banks. A down­grade of Fan­nie Mae or other main­stays in the hous­ing and credit sec­tors that are still strug­gling from the re­ces­sion could be par­tic­u­larly dev­as­tat­ing, an­a­lysts say.

Moody’s, which said it may move on the U.S. rat­ing by midJuly if Congress con­tin­ues to daw­dle over the debt limit, is re­view­ing in­sti­tu­tions through­out the U.S. econ­omy to de­ter­mine how de­pen­dent they are on fund­ing from the fed­eral gov­ern­ment and thus how vul­ner­a­ble they would be to a de­fault on U.S. obli­ga­tions.

“Some Aaa rat­ings of state and lo­cal gov­ern­ments could be vul­ner­a­ble to credit pres­sure where sov­er­eign credit link­ages are po­ten­tially strong,” the Wall Street agency said in a June 27 state­ment. But it added that the hand­ful of U.S. cor­po­ra­tions, such as Exxon Mo­bil and John­son & John­son, that have earned AAA rat­ings on their own, not through link­ages to the gov­ern­ment, likely would be un­af­fected.

Some Repub­li­can leg­is­la­tors have ar­gued that a de­fault can be avoided once the Trea­sury hits its debt ceil­ing next month if the gov­ern­ment gives top pri­or­ity to pay­ing in­ter­est on the debt and de­lays pay­ment of other gov­ern­ment obli­ga­tions un­til the im­passe is re­solved.

But a study by the Bi­par­ti­san Pol­icy Cen­ter said that strat­egy would back­fire and still en­dan­ger the gov­ern­ment’s credit rat­ing.

Trea­sury, which cuts about 80 mil­lion checks to pay the gov­ern­ment’s bills in a typ­i­cal month, could ex­haust all of the rev­enues it is due to re­ceive in Au­gust by pay­ing only six ma­jor items: in­ter­est on the ex­ist­ing debt, Medi­care, Med­i­caid, So­cial Se­cu­rity, un­em­ploy­ment in­surance and de­fense con­tracts, said the study’s au­thor, Jay Pow­ell, a for­mer un­der­sec­re­tary of the Trea­sury un­der Pres­i­dent Ge­orge H.W. Bush.

That would leave no money to fund en­tire U.S. de­part­ments, such as Jus­tice, La­bor and Com­merce, he said, and there would be no funds to pay for vet­er­ans’ ben­e­fits, IRS re­funds, mil­i­tary ac­tive-duty pay, fed­eral salaries and ben­e­fits, spe­cial-ed­u­ca­tion pro­grams, Pell Grants for col­lege stu­dents, or food and rent pay­ments for the poor.

“The choices would not be pretty,” Mr. Pow­ell said. More­over, Trea­sury’s abil­ity to roll over $500 bil­lion of se­cu­ri­ties that ma­ture dur­ing Au­gust would be in peril, he said, likely trig­ger­ing a down­grade even if Trea­sury strives to make all in­ter­est pay­ments.

ASSOCIATED PRESS

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