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S&P says US will get lowest rating if it defaults

News // Jun 30 2011

Source: SeattleTimes

A Standard & Poor’s executive said the agency will give the U.S. government its lowest credit rating if Congress fails to raise the borrowing limit and the United States defaults on its debt.

The government reached its $14.3 trillion borrowing limit in May. The U.S. Treasury says it will default on its debt if that limit is not increased by Aug. 2.

Should that happen, the U.S. would lose its AAA rating and receive a D, said John Chambers, managing director of sovereign ratings at S&P, in an interview Thursday with Bloomberg Television.

“If any government doesn’t pay its debt on time, the rating of that government goes to D,” Chambers said.

A lower credit rating would force the government to pay higher interest rates on Treasury bonds and notes. That would make mortgages and consumer loans more expensive because most loans track the yields on U.S. Treasurys.

But such an outcome is unlikely, Chambers said. He expects the White House and Congress to reach an agreement before the deadline.

“We think the government will raise the debt ceiling,” he said. “They’ve raised it 78 times … since 1960, often at the last moment. We think that will be the case this time.”

That’s also what Wall Street expects, said Lou Crandall, chief economist at Wrightson ICAP.

“There’s a recognition that a deal won’t get done until the last minute,” Crandall said. “As long as the deal gets done, it’s not going to have a lasting impact on interest rates or the Treasury’s ability to borrow.”

Lawmakers on Thursday took a step toward that end. The Senate abandoned plans for a July 4 break and instead will return Tuesday to work on a deal.

Senate Majority Leader Harry Reid, D-Nev., announced the scheduling change one day after President Barack Obama prodded lawmakers to act swiftly to raise the borrowing limit. In a challenge to the president, the chamber’s top Republican invited him to the Capitol to discuss the impasse with GOP lawmakers.

Republicans are demanding spending cuts equal to any increase in the debt limit. But they will not support any plan to cut the federal deficit that includes tax increases. The White House and congressional Democrats says the plan must include both.

S&P and the other ratings agencies have warned policymakers in recent months that they could cut the nation’s credit rating if the budget deficit isn’t brought under control. The deficit is projected to hit $1.4 trillion this year, the third straight year that it has exceeded $1 trillion.

 

[GARD]


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