A leading economist explained the other day that “financial markets in the U.S. are giving [default] a 0% probability of happening,” basically because investors believe “there’s no way” Congress “could possibly be this stupid.”
Say hello to non-zero probability — and the realization that Republicans might just be this stupid after all.
Moody’s Investors Service said Wednesday it has put the U.S. government’s top-notch credit rating on review for a possible downgrade because of the risk that Washington will not raise the federal debt ceiling in time to avoid a default.
The firm added that even a brief failure of the government to pay its bills would mean that the United States’s AAA rating “would likely no longer be appropriate.” […]
The U.S. has long been able to borrow money cheaply because global investors believe the government can be counted on to repay its debts. If credit rating agencies downgrade the U.S. and investors lose their faith in the creditworthiness of the government, the cost of borrowing money — in other words, the interest rate — could rise.
This caused a considerable stir late yesterday afternoon, and for good reason. The Republicans’ hostage strategy is starting to shift from scary to terrifying.
But there’s no reason this warning should have surprised anyone. A month ago, Moody’s Investors Service made clear the nation’s AAA credit rating is at risk of being downgraded by mid-July — well before the August 2 deadline — if it looks like failure is even a possibility.
Well, guess what, folks. It’s July 14, and the negotiations are going backwards. Moody’s wasn’t kidding.
In a sane political environment, this would prompt Republicans to reconsider their radical tactics. In our political environment, this will lead Republicans to proclaim, “You better hurry up with that ransom.”
What’s more, among others in the financial industry, who’ve long assumed that this posturing would be resolved long before there were real-world consequences, anxiety levels are rising.
In several recent reports, analysts at some the nation’s largest banks are resorting to truly hyperbolic terms in an effort to warn lawmakers and investors alike about the fallout of the debt limit being breached.
“Asking what the U.S. economy might look like after a possible U.S. Treasury default is akin to asking ‘what will you do after you commit suicide,’ ” wrote Steven Wieting, Managing Director in the Economic and Market Analysis team of Citigroup, in a July 11, 2011 report.
Wieting added that in his industry, “No one thinks any of this is funny…. You are talking about a catastrophic financial event.”
