Debt-Ceiling Deal Near, but Damage Done

Brinkmanship is damaging the country’s most valuable asset.

Newly redesigned $100 notes lay in stacks at the Bureau of Engraving and Printing on May 20, 2013 in Washington, DC.
National Journal
Patrick Reis
Oct. 16, 2013, 7:58 a.m.

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.

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