Fiscal Responsibility

Note to GOP: Credit Rating Downgrade Would Be Felt Across the Nation

Wanted to pass along this NY Timesarticle highlighting how a credit rating downgrade would be felt across the nation—slowing economic growth “for years to come,” hurting job creation and increasing the deficit.

Key excerpts:

“Some economists say the effects of lowering the federal government’s credit rating to AA from AAA can be measured in the billions of dollars in increased borrowing costs for the government, and in the billions more that consumers, corporations, states and municipalities will have to pay for their credit. It could also erode consumer and business confidence, slowing even further the economy and job creation.”

“The view among many on Wall Street on Tuesday was that long-term Treasury yields could edge up by 0.10 percentage points, to 0.70 percentage points. That would eventually increase the amount of interest the United States pays on its debt by as much as tens of billions of dollars each year. The government now pays $250 billion a year on interest costs to service its debt.”

“The size of the increase depends on how long the stalemate in Washington continues, Terry Belton, the global head of fixed-income strategy at JPMorgan Chase, said in a conference call with reporters on Tuesday.”

“On the high end, the government’s interest payments could climb an additional $100 billion a year, Mr. Belton said. ‘That is a huge number, representing a long-term permanent increase in U.S. borrowing costs.’”

“Rates would also increase on some markets priced off Treasuries, including mortgages, credit cards and student and auto loans, analysts warned.”

“For a typical consumer with a $200,000 mortgage, the increase in yields could translate into an increase of $200 to $400 a year in their loan payments, according to Citigroup analysts.”

“A downgrade would mean a weaker dollar, somewhat higher interest rates and a further blow to the already fragile national economic confidence,” Mr. El-Erian said. ‘This translates into weaker growth and even greater headwinds when it comes to job creation, which is absolutely critical at this stage.’”

“On Monday, some of the country’s largest state pension funds sent a letter to President Obama and Congress, warning that ‘the fallout will be felt all across America” and that economic growth ‘will stall for years to come.’”

“Standard & Poor’s has warned that if the United States is downgraded, many other sectors and institutions could be as well, which would cause them to face higher borrowing costs. Among those it put on a negative credit watch in mid-July were some bond issues by Fannie Mae and Freddie Mac, a few insurance companies, 604 structured finance transactions that totaled $373 billion when issued and some municipal debt backed by the United States.”

“But in the broader economy, if money that might have gone to new purchases or increased investment were instead diverted to higher interest payments, the result could be slower economic growth and a higher jobless rate for the remainder of the year, analysts warn.”

“Macroeconomic Advisers said the country’s gross domestic product could slow in the second half of this year to 2.6 percent from a forecasted 3.2 percent, and that the jobless rate could end the year at 9.6 percent, above the 9.2 percent expected.”

And another NY Times article illustrates how a credit rating downgrade would have a real impact on American families:

“The financial markets may become more volatile in the near-term, they say. And interest rates on several types of consumer loans can be expected to tick modestly higher because the rates track government-issued debt.”

“That said, the only investment that did not plunge in the 2008 market crisis was Treasuries, and they could conceivably lose some of their luster. ‘Sometimes I worry that a U.S. debt downgrade could have long-term negative psychological consequences as Americans realize the greatest power on earth is, alas, a mere mortal too,’ said Milo Benningfield, a certified financial planner in San Francisco.”

“Both the stock and bond markets are expected to endure a period of volatility if the nation’s debt drops a notch from its AAA perch…’it’s simply not possible to gauge precisely how the equity and fixed income markets would react and for how long, so the best course of action is to ignore the headlines and maintain a long-term approach.’ That sort of advice might come as cold comfort to people on the cusp of retirement, and for whom the memories of the recent downturn are fresh.”

“Fixed-rate mortgages generally track the 10-year Treasury note, whose interest rates would rise in the event of a downgrade. ‘The concern behind rates rising comes from the risk that investors — foreign and domestic — would rush to sell U.S. debt,’ said Cameron Findlay, chief economist at, noting that a sell-off would push the price of the debt lower, while causing its yield to rise. ‘So the question then is by what magnitude, and that remains the unanswered element everyone is struggling with.’”

“The interest rates on most private student loans are pegged to the London Interbank Offered Rate, or Libor, which is influenced by Treasury yields. So if the yields on government securities rise, student loan rates could rise as well, said Mark Kantrowitz, publisher of the FinAid and Fastweb Web sites. Borrowers taking out new loans, however, might see a greater increase in costs because of activity in the securities market backed by student loans.”

“The deficit reduction plan, which is likely to cut education spending, could have a broader effect on student lending. Some proposals, for instance, would cut subsidized interest on loans to graduate and professional students.”