US plays down future debt ratings downgrade
Geithner said he disagrees with Standard & Poor’s decision to lower its long-term outlook for the federal government’s fiscal health. The credit agency warned the government could lose its top credit rating in the next two years if lawmakers fail to come up with a long-term plan to bring down the deficit.
“We are not going to get behind this problem; we’re going to get ahead of it,” Geithner said.
The US government is projected to run a record $1.5 trillion deficit this year, marking the third straight year that the deficit has topped $1trn.
President Barack Obama and Republicans in Congress have proposed cutting $4trn from future deficits over the next 10 to 12 years. However, they disagree on how to do it.
The White House wants to cut the deficit by ending tax cuts for the wealthy.
Republicans reject that approach, preferring an overhaul of Medicare and spending cuts elsewhere.
The stand-off put the critical decision of whether to raise the nation’s borrowing ability in limbo.
Geithner said Republican leaders have privately assured the Obama administration that Congress will raise the government’s $14.3trn debt limit in time to prevent any default.
But Paul Ryan, chairman of the House Budget Committee, said there was no guarantee Republicans would agree to increase the debt ceiling without further limits on federal spending.
Monday marked the first time a top credit ratings agency has seriously hinted the US might be forced to not pay its debts, a warning experts say could herald changes for the country and the world.
In the world of credit a AAA rating is a gold star of approval; countries and businesses with such a rating can borrow extraordinarily cheaply.
When ratings agency Standard & Poor’s said the US has a one-in-three chance of losing its gold star in the next two years, it came as a shock.
The announcement was “like a gas explosion in a mine”, according to Gregori Volokhine, an analyst at Meeschaert Capital Markets.
The impact was immediately seen on stock, bond and currency markets, but the most profound impact may have been to make the unthinkable — a US downgrade — not only thinkable, but likely.
“If two years from now we have not done anything, and we’ve added another $2.5trn to the debt, it will no longer be a one-in-three chance,” said Steven Ricchiuto, chief economist at Mizuho Securities US.
“The probabilities of this are on an increasing scale,” he said, pointing blame directly at politicians who have tangled on the issue and who seem unable to agree on the date.
Once described as an “exorbitant privilege”, the dollar’s status nets the US around $40-70 billion each year, according to a 2009 study by consulting group McKinsey.
US assets are made more attractive to foreign lenders because they are priced in stable and always-in-demand dollars.
That high demand translates into cheap lending for the US government, households and businesses.
For households, a downgrade would spell higher mortgage rates, hitting an already dire housing market.
Companies meanwhile, “would see the cost of financing mount, which would hamper the productive investment”, Mufteeva added.
The relationship between the US and its major creditors — China, Japan and Europe — could also be transformed.
Ironically, losing AAA status would also make Washington’s task of trimming the deficit much more difficult, as it would raise the cost of government borrowing dramatically.
CONNECT WITH US TODAY
Be the first to know the latest news and updates
