As budget negotiations between President Obama and Congress continue to grab daily headlines, looming in the background of many news stories are references to Standard & Poor’s. A leading provider of financial ratings, S&P has repeatedly warned that it will downgrade the U.S.’s AAA/A-1+ credit score pending the outcome of the debt-ceiling standoff, and the creation of a debt-reduction plan.
S&P debt ratings chief David T. Beers makes no bones about this. “If you want your ratings to do what they are designed to do, you have to call these things as you see them,” he told the Wall Street Journal. “And that’s what we are committed to doing.”
The WSJ article outlines a rating downgrade’s potential domino effect: lenders (i.e., U.S. Treasury bond buyers) could require a higher interest rate on American debt, which would in turn trigger higher interest rates on “business loans, mortgages, credit cards, and student loans.”
Earlier this week, S&P released a report titled “U.S. Negative CreditWatch Placement and the Knock-On Effects.” S&P is weighing two main factors: (1) whether the debt ceiling is raised; and (2) how the government plans to reduce the debt over the long term. “Depending on how these issues are resolved, the current impasse could potentially—though not inevitably—cause widespread negative rating actions among U.S. public finance issuers in all sectors,” the report states.
One reason why the impact of a downgrade is difficult to predict with certainty is that the U.S. has never not made good on its debt payments. So says National Association of Realtors (NAR) tax counsel Linda Goold in a video interview with REALTOR Magazine. Rising interest rates would sting Goold’s industry, she says, placing mortgages out of reach for a number of potential homeowners.
Part mini-history lesson, part Congressional primer, the video also wins points for prescience—it appeared in April, well before the summer’s fiscal brinksmanship had really heated up. In the video, Goold reminds her audience that the country has long been a safe haven for cash because “the United States historically has always, always, always paid its debts.”
Nor has raising the debt ceiling been controversial—until this year. Traditionally the amount that the U.S. can finance has been increased by Congress via either a standalone bill, or as attached to an unrelated bill that was sure to pass into law.
But the stakes are now so high, Goold says, that “it is the entire economy in motion over one vote.” The current deadline for working out a budget deal is August 2, the U.S. Treasury Department’s cutoff for when the country will begin to default on its financial obligations.
The NAR’s chief economist, Lawrence Yun, says that despite the impending deadline, he is not yet seeing international investors make moves to dump their U.S. bonds. If they were to do so, interest rates would shoot up; however, the interest rates on U.S. Treasury 10-year bonds remain at a historic low of three percent.
Whether or not the U.S.’s credit rating is tarnished, “what is important is global bond investors’ comfort level,” Yun says. In the event of a downgrade, interest rates could skyrocket, or may not change much at all. “We don’t really know what will happen.”