Have we learned nothing from 2011?
The latest debt ceiling drama could lead to more credit downgrades. Politicians need to get their act together.
President Biden is meeting with Republican leaders in Congress to try and come up with a plan that would raise the debt ceiling and allow the United States to avoid defaulting on some of its financial obligations. The clock is ticking. Treasury Secretary Janet Yellen has said that the so-called X-date for default is June 1…and that it would be an “economic catastrophe” if no deal is struck by then.
We’ve been here before. US political leaders were embroiled in a nasty partisan battle in 2011. And how did that work out? Sure, a deal was eventually struck and there was no default. But that didn’t matter to officials at Standard & Poor’s, one of the major credit rating agencies.
S&P downgraded the US’s once pristine perfect AAA credit rating, taking it down a notch. That led to higher borrowing costs to service the nation’s debt load. Financial experts fear that could happen again if S&P or another rating agency cuts its rating.
That would likely lead to higher long-term bond yields, a phenomenon that not only hurts the US government but also any business or consumer trying to take out a loan. Mortgage rates in particular could shoot higher. There’s also the potential impact on the stock market to consider. Stocks could plummet on the back of another downgrade.
Hopefully Biden and House Speaker Kevin McCarthy can reach a compromise soon…or at the very least, show some signs of constructive progress instead of continued partisan bickering. The optics are important. Sure, some may write off the negotiations as politics as usual…the way things get done in Washington. Lots of acrimony before an eventual deal. But S&P wasn’t buying that argument in 2011.
S&P said one of its main reasons for its downgrade was that it “reflects our view that the effectiveness, stability, and predictability of American policymaking and political institutions have weakened.”
Sounds like not much has changed in the past dozen years.