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Debt-Ceiling Deal Near, but Damage Done Debt-Ceiling Deal Near, but Damage Done

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Debt-Ceiling Deal Near, but Damage Done

Brinkmanship is damaging the country's most valuable asset.

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(Mark Wilson)

Deal or no deal, the country is already paying a price for Congress's brinkmanship, and it's being done to the country's most valuable financial asset: the world's full faith in its credit.

Investors trust the federal government to pay its bills. They trust it so much that they're willing to lend the country money at absurdly low interest rates—even rates that don't keep pace with inflation. So, why are they willing to lend money to the government at what is, in real terms, a loss? Because it's the safest place to park one's money.

 

So long as one can trust the Treasury to pay it back.

But because of Congress's—and particularly some Republicans'—reticence to raise the debt ceiling, that trust is being eroded into an open question.

The latest sign of that erosion came Tuesday evening, when Fitch Ratings threatened to revoke the country's perfect credit rating. But those ratings exist in the hypothetical, in that they act as a guide to lenders in how much interest they should be demanding in return.

 

What actually matters for the country's budget is how much investors actually do demand. And there too, there are signs of trouble.

In 2011, the country saw a spike in the interest rates its lenders were demanding in exchange for holding its short-term debt. The interest rate on the 4-week Treasury note shot up 16 basis points—a financial unit of measure worth one one-hundredth of a percent—in the week before the Congress reached a deal on Aug. 2.

This time around, it's even worse. A month ago, the four-week Treasury bill was paying out at basically zero, a rate around which it has hovered for most of 2013. But as of Tuesday, that rate had shot up to 35 basis points—by far its highest level of the year.

"The market is worried about a delayed or skipped interest payment," said Joseph LaVorgna, chief U.S. economist at Deutsche Bank.

 

History suggests the damage can be undone: In 2011, the entire increase in the country's short-term borrowing costs was erased the day after President Obama signed Congress's deal to raise the debt ceiling.

A default would do permanent damage to the country's borrowing costs, but so long as Congress again reaches a deal before default this time around, borrowing costs should go back to normal, LaVorgna said.

But everyone, from deficit hawks to advocates of new social programs, better hope he's right.

Given that basis points are a hundredth of 1 percent, it's tempting to believe that the country could pay a slightly higher interest rate without breaking the bank. But with debt reaching $16.7 trillion, even marginal changes can have massive consequences: Applied across the entire debt, every additional basis point of borrowing costs costs the country around $1.6 billion annually.

Matt Berman contributed to this article.

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