StanCollender'sCapitalGainsandGames Washington, Wall Street and Everything in Between

Debt Ceiling: A Downgrade Would Be Costly

27 Jun 2011
Posted by Stan Collender

This is for all those who say that not increasing the debt ceiling will have no impact whatsoever...

1. Two rating agencies -- Moody's and Fitch -- have already said that they will consider downgrading U.S. debt from its current triple A rating.

2. The Financial Times today published a story that said:


Investors in the US government bond market could face losses of up to $100bn if the largest economy loses its triple A rating, according to a research arm of McGraw-Hill, the parent of Standard & Poor’s.
A ratings downgrade that results in higher bond yields and lower prices could also mean the US Treasury paying $2.3bn-$3.75bn a year more in interest on financing a $1,000bn annual budget deficit.

“If Standard & Poor’s or any of the other major rating agencies downgrade the US, Treasuries would likely drop in value, possibly by as much as $100bn,” said analysts at S&P Valuation and Risk Strategies, a research team separate from the agency.


Fuzzy numbers

If the debt got downgraded I dont see how the market value of treasuries drops only 100billion.

When you think about it thats less than a 1% net value move in the bond market and that happens at other times.

Also the financing figures are off because not only are you financing the current deficit you also have to factor in the amount of debt rolling over of which a lot is short term in nature unfortunately.

But then again the bond market doesnt want insane spending like Stan was advocating months ago.( which will no doubt bring downgrades on our debt in a few years like was actually written in the research report a month or so ago ) The bond market wants entitlement and budget reforms along with getting paid their money back on investments

Tend to agree. I think the

Tend to agree. I think the $1 trillion figure had to be for the sake of example, rather than an effort to get a ballpark figure. You know, big round number ignoring complexity. Fact is that higher borrowing rates get locked in over time, as you roll over longer-dated paper. Treasury typically doesn't adjust its maturity schedule to take advantage of the shape of the curve, so it rolls old 5s to new 5s, more or less. Rolling bills makes the cost of higher rates bite quickly, but rolling notes makes the cost more long lasting.

Either way, it would be really expensive to default, and face it folks, Greece and Portugal and Spain and Ireland and Italy are all threats to the banking system. Add the turmoil of a US default and the risk of bank failures rises spectacularly, while impairing the ability of the US government to provide help. Greece is already baked in the cake, but a US default would be intentional - criminally irresponsible.

To what rating would the

To what rating would the downgrade go? Issues in default are typically D. If that holds, then the drop in quality would be from AAA to D, not just a tiny adjustment downward. And when an entity comes out of default, the rating doesn't return to close to its old rating. Maybe the US goes from D to C?

And what is the impact on debt of subnational governments? Some years ago when I was working in Russia, some cities (St. Petersburgh, in particular) thought they merited a higher debt rating than the agencies would give and the agencies said that they would not give a subnational government a higher rating than that held by the central government. Would high-rating US municipalities face an automatic downgrade if the federal government rating falls?

How in the world are the idiots even playing with this eventuality? Markets do not regard US government debt as particulary risky (check the interest rate) on the economics.

Cascading effects

I'm more familiar with foreign currency credit ratings, but can a non-sovereign have a local currency rating higher than the sovereign? If not, then the effect of a downgrade would cascade down through the entire system of sub-sovereign and commercial bonds.

Plus ça change, Plus c'est la même chose

The fact that we are here today to debate raising America's debt limit is a sign of leadership failure. Leadership means that ‘the buck stops here.’ Instead, Washington is shifting the burden of bad choices today onto the backs of our children and grandchildren. America has a debt problem and a failure of leadership. Americans deserve better. I therefore intend to oppose the effort to increase America's debt limit.

Senator Barack Obama - March 16, 2006 - just before he and every other Democratic Senator voted against raising the debt limit to $8,956,000,000,000

Presumably we are now far more creditworthy and have a surplus of leadership with a debt limit of $14,345,000,000,000. And will become even more so once we add a few more zeros. Mobius math - DC style.

You want to see costs? Wait until interest rates normalize -- and interest alone on the increased debt amounts to $700,000,000,000 per year - every year - forever. You know -- "shifting the burden of bad choices today onto the backs of our children and grandchildren".

Why not do what businesses do

Why not do what businesses do when they don't have money to go around and can't borrow any.. defer paying, or pay some but not all on each account; have our AP people call their AR people and try to work out extended payments; only pay some of the veterans and social security recipients on a rotating basis; send out IOU's to the bond-holders.. That should make the folks who want Washington run like a business feel good.
What a tragedy. Our once great country owes $306.7 BILLION against income of $172.4 BILLION that's a shortfall of $134 BILLION! For ONE month. We owe almost twice as much as we actually have! You can try and blame Bush all you want, but that's 0bamaReidPelosi deficit. I guess it's true: "socialism works great until you run out of other people's money". Children now in diapers will be economic slaves to our debts. How sad. The debt ceiling is to be raised before August 4, and even though there is a month to forge the negotiation of debt limit raising, there are already concerns being issued against allowing the US government to default on its debt.

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