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 »
WOULD HAVE BEEN HIS SECOND STINT
Howard Dean Pulls out of DNC Race
2 hours ago
THE LATEST

Howard Dean, the former Vermont governor and Democratic National Committee chair, announced he's pulling out of the running to regain the chairman's post. Dean "announced in a pre-recorded video to a conference of state Democratic chairs that he would step aside to allow for a new face to lead the party as it seeks to rebuild."

Source:
RUBENSTEIN FUNDING ELEVATOR REPAIR
Washington Monument Closed until 2019
4 hours ago
THE DETAILS

"Once again, businessman and philanthropist David M. Rubenstein has come through for the National Park Service. This time, he's pledged funding needed to modernize the Washington Monument's elevator-- but the monument will remain closed until 2019 while repairs and improvements are underway. Rubenstein's donation of between $2-3 million, announced Friday, will correct those ongoing elevator issues, which have shuttered the monument since August 17."

Source:
$618 BILLION IN FUNDING
By a Big Margin, House Passes Defense Bill
7 hours ago
THE DETAILS

The National Defense Authorization Act passed the House this morning by a 375-34 vote. The bill, which heads to the Senate next week for final consideration, would fund the military to the tune of $618.7 billion, "about $3.2 billion more than the president requested for fiscal 2017. ... The White House has issued a veto threat on both the House and Senate-passed versions of the bill, but has not yet said if it will sign the compromise bill released by the conference committee this week."

Source:
FILED BY JILL STEIN
Michigan Attorney General Sues to End Recount
8 hours ago
THE LATEST

Bill Schuette, Michigan's attorney general, has filed a lawsuit on behalf of the state to halt the recount of the state's voting results. The recount was elected by Green Party candidate Jill Stein. Schuette says the recount shouldn't occur because Stein cited no evidence of voter fraud or tabulation error.

Source:
SUCCEEDS UPTON
Walden to Chair Energy and Commerce Committee
9 hours ago
THE DETAILS

"Republicans have elected Rep. Greg Walden (R-OR) the next chairman of the powerful House Energy and Commerce Committee. Walden defeated Reps. John Shimkus (R-IL) and Joe Barton (R-TX), the former committee chairman, in the race for the gavel" to succeed Michgan's Fred Upton.

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