Inching Towards Default

It’s Wednesday night and the prospects are looking increasingly dim for a political solution for the politically driven risk of a US Treasury default. The credit rating agency Fitch earlier today “placed the United States of America’s (U.S.) ‘AAA’ Long-term foreign and local currency Issuer Default Ratings (IDRs) on Rating Watch Negative (RWN),” the firm announced  yesterday afternoon. “The prolonged negotiations over raising the debt ceiling (following the episode in August 2011) risks undermining confidence in the role of the U.S. dollar as the preeminent global reserve currency, by casting doubt over the full faith and credit of the U.S. This ‘faith’ is a key reason why the U.S. ‘AAA’ rating can tolerate a substantially higher level of public debt than other ‘AAA’ sovereigns.”

Adding to the rising concern that time is running short (the Treasury’s ability to borrow runs out on Thursday without a legislative green light from Congress) is the Tuesday-evening collapse of the House’s efforts to reopen the government. In other words, it’s up to the Senate to avert a default that’s little more than a day away.

As for the financial situation, the immediate threat, according to Fitch, runs as follows:

Although the Treasury would still have limited capacity to make payments after 17 October it would be exposed to volatile revenue and expenditure flows. The Treasury may be unable to prioritise debt service, and it is unclear whether it even has the legal authority to do so. The U.S. risks being forced to incur widespread delays of payments to suppliers and employees, as well as social security payments to citizens – all of which would damage the perception of U.S. sovereign creditworthiness and the economy.

Is the Senate up to the task of dispatching legislation on Wednesday that solves the political stalemate? In other words, can the Senate craft a solution that can pass the dysfunctional and chaotic landscape otherwise known as the House of Representatives? We’ll have the answer in about 24 hours.

Meanwhile, “Given tonight’s events, the [Senate] Leaders have decided to work toward a solution that would reopen the government and prevent default,” advises Michael Bruman, a spokesman for the Senate’s Republican Minority Leader Mitch McConnell. “They are optimistic an agreement can be reached.”

That leaves one question: How many in Congress–the House Republicans, in particular–share Sen. McConnell’s alleged optimism?

About James Picerno 895 Articles

James Picerno is a financial journalist who has been writing about finance and investment theory for more than twenty years. He writes for trade magazines read by financial professionals and financial advisers.

Over the years, he’s written for the Wall Street Journal, Barron’s, Bloomberg, Dow Jones, Reuters.

Visit: The Capital Spectator

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