Wednesday, June 29, 2011

Reuters: US Treasury Credit Rating will be “D” if Debt Ceiling Not Raised

Standard and Poor’s managing director told a Reuters reporter today that if the US Treasury defaults on scheduled August 4th payments because the Republican congress fails to raise the debt ceiling in time, it will revise the government’s current Triple-A rating, its highest ranking, to a “D” rating – the only rating lower than “D” is “D-Minus.”

This is the criteria Standard and Poor uses to assign a “D” rating:
“An obligation rated 'D' is in payment default. The 'D' rating category is used when payments on an obligation, including a regulatory capital instrument, are not made on the date due even if the applicable grace period has not expired, unless Standard & Poor's believes that such payments will be made during such grace period. The 'D' rating also will be used upon the filing of a bankruptcy petition or the taking of similar action if payments on an obligation are jeopardized. An obligation's rating is lowered to 'D' upon completion of a distressed exchange offer, whereby some or all of the issue is either repurchased for an amount of cash or replaced by other instruments having a total value that is less than par.”
Currently the US borrows 40 cents of every dollar it spends. So to avoid a “D” rating, after August 4th the US government will have to cut its spending by 40% or risk going into default. This is obviously what Tea Partiers have in mind so while the ratings people think that there is only a remote chance that the debt ceiling won’t be raised in time, I am having my doubts.

Now someone has pointed out that US government debt is constitutionally guaranteed by the 14th Amendment. This clause from Section 4 being the operative statement:
The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned.
So theoretically S and P’s warning that they will lower the government’s credit rating to “D” is an idle threat because to do so would be unconstitutional. But I wonder about that. Theoretically raising the debt ceiling those scores of times in the past 50 years is also an unconstitutional act because a debt ceiling is not needed if “the validity of the public debt … shall not be questioned.”

My head hurts.

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