Saturday, July 23, 2011

S & P: We Must Reduce Deficit — or Face 'Death Spiral'

Officials from Standard & Poor’s and other credit rating agencies told a gathering of Republicans this week that a default on the nation’s debt by the federal government could lead to a “death spiral” in the bond market.

The meeting of more than 40 House Republicans on Thursday was hosted by Rep. Nan Hayworth, a freshman from New York, who stated in a letter inviting members to the event that “a downgrade to the U.S. sovereign debt rating would have many immediate and negative consequences that will affect both Wall Street and Main Street.”

“As liberals caterwaul about cutting the budget in the midst of a recession and advocate a simple vote to raise the debt limit without budget cuts, they fail to mention the warning from Moody's and S & P that unless there is also serious deficit reduction, we may see a lowering of our credit rating anyway, even if the debt limit is raised,” Rick Moran wrote on the conservative American Thinker website.

“Of all the predictions of what would happen if the ceiling isn't raised, the loss of AAA status for our bonds and T-Bills is the most catastrophic,” Moran continued. “We would be forced to raise interest rates - perhaps ruinously - and increase the amount we must pay every year to service our debt. With interest rates close to zero now, even a modest increase would see our debt service payments rise by hundreds of billions of dollars.”

One credit rating official at the GOP meeting warned of a worst-case scenario in which a default could result in a rapid drop in bond values, sparking chaos in the markets, Politico reported.

Republicans were also told that even if the debt ceiling is raised, credit raters could still assign a negative outlook to the nation’s debt unless the government undertakes a serious deficit reduction program.

Rep. Mike Pompeo of Kansas said “one of the messages they had for us today was unmistakable — that if we kick the can down the road, it’s a bad outcome for U.S. Treasuries,” according to CNN.

Also attending the 90-minute meeting were officials from Investment Company Institute, Depository Trust Clearing Corporation, and JP Morgan.

A week ago, S & P warned that there was a one-in-two chance it could downgrade the nation’s long-term credit rating within 90 days, “owing to the dynamics of the political debate on the debt ceiling.”

Treasury Secretary Timothy Geithner estimates that if the debt ceiling is not raised, by Aug. 2 he will no longer be able to pay all of the country’s bills in full. But some Republicans have questioned that date, saying Treasury would be able to take cash from various investments to make up for the shortfall.

“Starting August 2, I’m sure some decision will have to be made,” Rep. Charles Boustany of Louisiana, who attended the Thursday meeting, told CNN.

“But it won’t be catastrophic. But clearly, each day will be important after that. And I think August 15 is going to be, potentially, a very serious point in time.”

On August 15, Treasury must make a large interest payment to investors.

The credit rating officials told the Republicans that a “bipartisan solution” to deficit reduction is important, Politico noted. But the lawmakers declined to say if they recommended new tax revenues as part of that deal.

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