Credit agencies warn of bond 'death spiral' if credit limit not raised

The pressure on House Republicans to play ball on raising the debt ceiling is becoming very intense. Last week, Speaker Boehner hosted a closed door session with the entire GOP caucus during which experts outlined the dire consequences to the economy and the budget if August 2nd came and went with no increase in the debt limit.

Yesterday, if was one of their own - freshman Rep. Nan Hayworth - who brought in people from Moody's and Standard and Poors to give lawmakers the lowdown on the effects of a failure to increase the debt ceiling.


House Republicans were cautioned Thursday in a closed door meeting with credit rating agency officials that a "death spiral" in the bond market was one of the possible outcomes in the event of default.

One official warned of a worst-case scenario in which a default on the nation's credit could result in a rapid drop in bond values, sparking chaos in the markets - a dramatic warning as Washington worked on a possible deal on deficit reduction and an increase in the debt limit.

Members who attended the meeting later countered that the tone of the discussion was not nearly as apocalyptic as the phrase initially made it sound. According to sources inside the room, the "death spiral" term was also used in reference to the collapse of Lehmann Brothers in September 2008 as a historical example.

Rep. Nan Hayworth, a freshman Republican from New York, hosted this off-the-record meeting with GOP House lawmakers Thursday afternoon. Hayworth called the meeting a "dispassionate and objective" discussion about the potentially disastrous consequences of not raising the debt ceiling by the August deadline. But Republicans said they were also told that unless the government undertook a serious deficit reduction program, the credit ratings could still assign a negative outlook to the nation's debt anyway.

That last sentence is key. As liberals caterwaul about cutting the budget in the midst of a recession and advocate a simple vote to raise the debt limit without budget cuts, they fail to mention the warning from Moody's and S & P that unless there is also serious deficit reduction, we may see a lowering of our credit rating anyway, even if the debt limit is raised.

Of all the predictions of what would happen if the ceiling isn't raised, the loss of AAA status for our bonds and T-Bills is the most catastrophic. We would be forced to raise interest rates - perhaps ruinously - and increase the amount we must pay every year to service our debt. With interest rates close to zero now, even a modest increase would see our debt service payments rise by hundreds of billions of dollars.

It's one thing to dismiss the warnings of President Obama and the Democrats. But can we dismiss the predictions of those responsible for rating our bonds - people who don't give a fig about Republican, Democrat, liberal, conservative but only care about the esoteric nature of the bond market?

I wonder.

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