US default risk is real, Washington warns Wall Street

Money lenders trust America so implicitly that they generally dismiss the risk it won’t pay its debts. But in the US capital, fears are growing that political dysfunction might trigger the unthinkable.

A few years ago one would have said, ‘Don’t be silly. Of course they will raise the debt ceiling.’ But one can’t say that any more.  

Government veterans from both political parties are aghast that lawmakers openly speak of managing a default that could be triggered next month if they don’t authorise more borrowing.

Another reason for concern is that the debate over the debt ceiling appears stuck on a Republican demand for big spending cuts in exchange for raising the $US16.7 trillion ($17.8 trillion) borrowing limit.

This could be too tall an order because Washington is already slashing spending on almost everything but the welfare state. To go further, Congress would likely have to make cuts in sacrosanct programs like pensions and healthcare for the elderly, something lawmakers appear loath to do.

“The ingredients to put together a deal are diminishing,” said Tony Fratto of consultancy firm Hamilton Place Strategies, which advises investors on the workings of Washington. “Only the tough choices are there,” said Fratto, who was a spokesman at the White House and Treasury during the Bush administration.

THE ‘UNTHINKABLE’

A US default would rock Wall Street and quite possibly trigger another economic crisis in a nation still struggling to recover from the 2007-09 recession. Borrowing costs could spike across the economy.

The last debt ceiling showdown in 2011 pushed the nation to within days of missing payments and led ratings firm Standard and Poor’s to strip Washington of its sterling credit rating. However, an impasse this time around isn’t likely to affect the US sovereign rating, a Moody’s analyst said, because the agency is focused on the long-term debt outlook.

In 2011, Congress and the White House averted crisis by agreeing to deep spending cuts that were enacted this year but which largely spared so-called entitlement programs like Social Security pensions and Medicare insurance.

With the least difficult cuts already made, it could be much harder to reach a new budget-tightening deal before the nation runs out of cash. The White House has pledged not to even engage Republicans in a debate over the limit on borrowing.

“I feel less comfortable now than I did even in 2011,” Bell said.

Investors, however, still appear to be betting there is a smaller risk of default than the last time.

Full article: US default risk is real, Washington warns Wall Street (The Sydney Morning Herald)

Comments are closed.