U.S. default deniers could get what they wish for
By Richard Beales
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
Fitch Ratings is the latest credit watchdog to warn about the consequences of a missed interest payment by the United States. Yet there’s a faction in Washington that seems increasingly inclined to push the country’s debt fight that far. Maybe only the ensuing mess could persuade the brinkmen to back off.
At least it would explode the false choice on offer. Republicans who say they’re willing to risk a brief, technical default by the federal government mostly think a timely political deal to raise the statutory U.S. debt cap would encourage further excessive taxation and government spending at the hands of Democrats. They reckon a temporary default would be worth it to bring a long-term deal on spiraling healthcare and retirement obligations.
Action to reduce federal deficits is needed, or one day the government really will run out of money. But the struggle in Washington to coalesce on anything suggests another temporary budget agreement is the most likely result of the current fight. And if a technical default followed, it could be far worse than the gung-ho GOPers are imagining. Peru got away, more or less, with a missed payment in 2000, but had a clear rationale and was a known risky and peripheral credit. For America, the world’s credit benchmark and issuer of its reserve currency, most evidence and analyst opinion suggest a scarier outcome.
The credit rating and borrowing cost impact could be severe. But Fitch also points to repo markets — crucial plumbing for the global financial system — where an estimated $4 trillion of U.S. Treasuries are used as collateral. There are implications for the stability of money market funds, too.
Trouble in either place would echo the 2008 crisis. JPMorgan analysts also note the 40 percent decline in foreign holdings of the debt of Fannie Mae, Freddie Mac and other agencies in the year after they were bailed out, despite government backing for their credit.
That’s a hint that even if a technical default wasn’t disastrous in the short term, deciding not to pay would damage trust in U.S. debt and the dollar for the long term. The danger for chicken-playing legislators is that Mr. Market, who has turned perhaps too benign an eye so far, starts delivering a harsh verdict sooner than the putative August deadline. Even reaching that date doesn’t mean Uncle Sam will inevitably miss a payment. But a loss of confidence would not be easily reversed even if Washington compromises.