Cut in US credit rat­ing would harm econ­omy

USA TODAY Weekend Extra - - MONEY - Paul Davidson Con­tribut­ing: Janna Her­ron

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.


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