Cut in US credit rating would harm economy
The government shutdown is starting to raise concerns about Congress’ ability to raise the U.S. debt ceiling and pass a budget – worries that ultimately could affect borrowing costs for consumers and businesses, as well as the overall economy.
Over the past week, Fitch Ratings has said the shutdown could lead to lawmakers’ failure to raise the nation’s debt limit, or borrowing authority, later this year. That, in turn, could prompt Fitch and other credit rating agencies to lower the country’s triple-A sovereign rating.
And that would spell trouble for an economy that’s already expected to slow this year.
“What we’re saying is the shutdown is more evidence there is some lack of cohesion in policymaking,” Charles Seville, Fitch’s senior director, said in an interview Wednesday.
The rating agency’s message was an early warning shot in a drama that’s expected to play out over the coming months. But Fitch made clear it views the risk of Congress not raising the debt limit as “remote.” And it issued no formal warning or negative outlook on the nation’s creditworthiness.
Still, it said in a news release late last week, “Evidence of greater dysfunction in fiscal policymaking could still contribute to negative pressure on the U.S. rating. This is especially the case as deficits continue to increase.”
The chief concern is that without an increase in the country’s ability to borrow, the U.S. would not be able to meet its financial obligations, particularly paying interest to its bondholders.
The deadline to raise the debt limit is in March, but the Treasury Department can use extraordinary measures to extend that by several months.
In 2011, Standard & Poor’s lowered the U.S. credit rating even after Congress reached a last-minute deal to raise the debt ceiling. It cited the political brinkmanship that preceded the agreement and a lack of confidence in lawmakers’ ability to reduce the federal deficit over the longer term.
Here’s how a drop in the nation’s credit rating could affect interest rates, markets and the economy:
❚ Raise government borrowing costs: A lower rating, whether based on a failure to raise the debt ceiling or the threat of such an event, could boost interest rates on Treasurys, increasing government borrowing costs and further swelling the federal debt.
In 2011, however, the downgrade didn’t push up Treasury rates because Treasurys were still viewed as a relatively safe investment. In fact, the yield on a 10-year Treasury fell from 2.56 percent to 2.32 percent after the downgrade.
❚ Increase borrowing costs for consumers, firms: Treasury bonds are used to set rates for assets such as 30-year fixed mortgages and corporate bonds.
“It’s still the benchmark for most borrowing by businesses and households,” says Nancy Vanden Houten, senior economist at Oxford Economics. Higher rates can discourage borrowing and hurt the economy.
Uncertainty about the government’s ability to spend also stirs worries about the economy, which can increase corporate borrowing costs, says Joel Prakken, chief U.S. economist of Macroeconomic Advisers.
❚ Raise costs for states and local governments: Interest rates on many of their obligations are similarly pegged to Treasurys.
❚ Clobber markets: On the first business day after Standard & Poor’s cut the country’s triple-A rating in 2011, the Dow fell 5.5 percent.
❚ Douse consumer and business confidence: Consumer confidence fell more than 20 percent during the 2011 standoff in Congress.