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
Add to Briefcase
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.

Matt Berman contributed to this article.
What We're Following See More »
Doesn’t Express Confidence in Marino
Trump to Declare Opioid Emergency Next Week
3 minutes ago
THE LATEST

After initially promising it in August, "President Trump said Monday that he will declare a national emergency next week to address the opioid epidemic." When asked, he also "declined to express confidence in Rep. Tom Marino (R-Pa.), his nominee for drug czar, in the wake of revelations that the lawmaker helped steer legislation making it harder to act against giant drug companies."

Source:
INTERVIEW THIS WEEK
Trump Still Considering Yellen For Fed
7 hours ago
THE LATEST

"President Donald Trump plans to formally interview Janet Yellen this week about potentially staying on as Federal Reserve chair, two people familiar with the matter said...Many Republicans on Capitol Hill want Trump to move on from Yellen, whose first term ends in February, and choose a more traditionally conservative Fed chair."

Source:
NOMINEE FOR ONDCP
Trump Noncommittal on Marino
7 hours ago
THE DETAILS
IN LIGHT OF 60 MINUTES REVELATIONS
Manchin Asks Trump to Drop Marino’s Nomination for Drug Czar
9 hours ago
THE LATEST
WOULD OVERTURN MARINO LEGISLATION ON DRUG DISTRIBUTORS
McCaskill Will Introduce Bill in Response to “60 Minutes” Scoop
9 hours ago
THE DETAILS

In the wake of Sunday's blockbuster 60 Minutes/Washington Post report on opioid regulation and enforcement, Sen. Claire McCaskill (D-MO) has introduced legislation that "would repeal a 2016 law that hampered the Drug Enforcement Administration’s ability to regulate opioid distributors it suspects of misconduct." In a statement, McCaskill said: “Media reports indicate that this law has significantly affected the government’s ability to crack down on opioid distributors that are failing to meet their obligations and endangering our communities."

Source:
×
×

Welcome to National Journal!

You are currently accessing National Journal from IP access. Please login to access this feature. If you have any questions, please contact your Dedicated Advisor.

Login