What Really Happens If Debt Ceiling Deadline is Missed?

The rhetoric among U.S. lawmakers regarding the debt ceiling issue is as intense as anything heard in recent memory, as all sides are trying to put as much drama into this debate as humanly possible. The problem is that nobody really knows exactly what will happen if the debt ceiling agreement is not reached by August 2, as this is unprecedented. The reactions will be hard to predict, and there will be lots of choices to be made should the debt limit prohibit the U.S. from issuing any more securities as a means to pay its obligations.

In reality, the US will have much of what it needs financially regardless of the decisions on the debt ceiling over the next several weeks. Then it becomes a matter of setting priorities. Much has been made of what happens should the U.S. default on its debt obligations to those holding securities, but it is nearly certain that these obligations will be paid first. The most likely decision will be to delay payments to those doing business with the government. All contractors will be at risk—and for an extended period of time.

Much has been made of the reaction expected from the investment community but, in truth, there have been mixed signals. The bond yield would have been expected to rise sharply if the market thought that a real default was imminent, but it has remained stable until very recently. Even the recent increase has been modest. The assumption on the part of the bond market is that the U.S. is going to make sure that investors are paid and its credit rating will be preserved. There is always the chance that confidence will slip and the bond yields will spike, but, thus far, this is not taking place.

If the bond market doesn’t react, the interest rates will not spike. The US may yet see its sovereign credit rating downgraded [as threatened most recently by “big three” ratings agency Standard & Poor’s] though, and that could have an impact. Much will depend on what the ratings agencies think about US intentions. At the moment, they are reacting to the rhetoric in the U.S. and have to figure in a default. But, as soon as the U.S. shows its desire to pay creditors the ratings groups will likely leave the rating unscathed—but with all manner of strict warnings.

But here are threats that go beyond the debt ratings though, and these constitute a bigger risk but one that is even more unpredictable. Many who assert that the economy is too fragile for this kind of hit for thousands of businesses and individuals. The bottom line is that nobody really knows what the impact of the shutdown might be, but nobody assumes it will be benign.

Source: Armada Corporate Intelligence

1 comment:

  1. I am no economist and have no crystal ball but I think a few things are likely to happen if no agreement is reached. If mortgage rates go up by even a point, it will make it harder for me to sell my home or buy another one. I will wait to remodel my 50 year old kitchen. The payment for my HELOC will rise and that will force me to devote more of my income to paying it down quicker. In itself that is probably a good thing but it also means I will have even less disposable income to spend on anything else. As a credit manager in the construction/housing industry I can tell you that I am hearing nervous laughter and black humor from my customers. Most say they think a deal will be cut and a way will be found to avoid default but no one is prepared to bet on it. Many have said they feel that the great issue - jobs - is being ignored.