What if there the Just a Brief Default to Signing a Budget

by Wall Street Rebel - Michael London | 05/24/2023 10:44 AM
What if there the Just a Brief Default to Signing a Budget

Suppose the government cannot fulfill an interest payment obligation, even if the delay is brief. If such a scenario were to occur, the entity's creditworthiness would likely be adversely impacted. The potential consequences of a default on the economy are dire, and we must take prompt action to prevent it.


If the United States government were to experience a brief period of default on its debt in the upcoming week, the potential consequences for the nation's future could be significant and long-lasting. S&P Global Ratings, Moody’s, and Fitch Ratings are widely recognized rating agencies on a global scale, and their contribution to evaluating the severity of these impacts is significant.

It is expected by the agencies that a consensus will be achieved among the politicians before the exhaustion of federal funds to fulfill their financial responsibilities. This situation may come to fruition in the upcoming month. The rationale behind this is that the repercussions of a failure to meet financial commitments would be considered noteworthy. In the hypothetical scenario where the government defaults on a debt payment, the three firms have committed to reducing the credit rating of the United States as a debtor. In the event of a default, there exists a possibility that even in the case of a prompt resolution, the parties involved may exhibit hesitancy towards reinstating the default to its antecedent state. The rationale behind this is that each of the three corporations has committed to reducing the credit rating of the United States as a debtor if the government defaults on a debt payment.

According to Moody’s, the perception of debt-ceiling brinkmanship could shift from being perceived as mere political theater to a legitimate threat to the government's creditworthiness, even if the default is brief. Although the United States has not deliberately defaulted on its debt in contemporary times, it has nonetheless faced difficulties in this area.

As per the statement made by William Foster, the primary analyst for the United States at the rating agency, it is our viewpoint that the rating would necessitate a perpetual contemplation of the same. According to the rating agency, failure to make an interest payment would result in a one-notch decrease in the credit rating of the United States Treasury Department. According to Mr. Foster's analysis, the restoration of the United States of America's previous top ranking would require a substantial modification of the debt ceiling by lawmakers or its complete elimination from consideration. From our standpoint, it is imperative to integrate that element into the evaluation process consistently.

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Credit ratings are a crucial component of financial agreements on a global scale. These ratings, which range from D or C according to the S&P and Moody’s scales to AAA or Aaa for the most exemplary borrower, are used to evaluate the creditworthiness of individuals and entities. Frequently, they establish the quality of debt that pension funds and other investors may hold and the types of assets that can be employed as collateral to secure transactions. The credit ratings of a nation are utilized as a gauge of its financial stability, with countries with lower ratings generally encountering heightened borrowing costs.

As per Mr. Foster's statement, a potential deadlock on the debt limit resulting in a default would not be consistent with the highest possible credit rating the United States can attain. If the regulation is removed or modified to reduce the probability of causing a default situation, it would be suitable to contemplate reevaluating the credit profile. This has the potential to result in the restoration of the Aaa rating.

In 2011, the United States experienced a debt-limit episode which reduced its credit rating by one level by S&P. This occurred despite the eventual resolution of the issue and the avoidance of default. Since then, the credit rating agency has consistently upheld the AA+ rating at a marginally reduced level.

The dominant factor that exerted the greatest influence in the 2011 decision was the prevailing political environment, which exhibited a clear path toward default. "It still persists," remarked John Chambers, a member of the S&P group that lowered the government's rating during that time. The current discussion validates the validity of S&P's decision to decrease the rating and uphold it at its present level.

If Fitch or Moody’s were to arrive at a similar determination, the United States would forfeit its membership in the select cohort of the globe's most highly regarded debt emitters. The United States continues to be perceived as a triple-A-rated country by a significant number of investors, given that it has been assigned this rating by two of the three relevant authorities. The Aaa rating bestowed by Moody’s is a distinction granted to a mere 12 nations, and a potential downgrade would result in the United States being ranked below esteemed countries such as Germany, Singapore, and Canada.

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Despite the absence of a default, there is a possibility that the United States' stance may be compromised. According to Mr. Foster, Moody’s can reduce the rating "outlook" of a debtor during evaluation if the X-date, which signifies the point at which the government will have exhausted its resources to pay outstanding debts, is surpassed. According to the Treasury's estimation, the previous date may arrive as soon as June 1st.

The United States possesses a favorable strategic position within the global economy due to the widespread use of the dollar as the primary currency in international trade and its position as the largest market for U.S. government debt worldwide. The potential lack of dependability of the nation may provoke apprehension among global investors and governments, who hold a significant portion of the United States financial obligations. The potential consequences of this action may jeopardize the nation's ability to secure favorable financing conditions, as it has done in the past. They may also disrupt its standing in the global arena.

During a recent conference attended by prominent financial leaders worldwide, Sri Mulyani Indrawati, the Finance Minister of Indonesia, expressed her concerns regarding the potential consequences, indicating that it would not benefit the United States.

Amidst the ongoing deadlock concerning the debt ceiling, Mr. Foster abstained from making any declarations regarding his communication with the US government concerning Moody’s planned assessment of the nation's creditworthiness.

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                       How the U.S. national debt reached $31.4 trillion

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