Home Borrower Corporate borrowing costs would skyrocket if US debt defaults: Moody’s

Corporate borrowing costs would skyrocket if US debt defaults: Moody’s



Dive brief:

  • Failure of Congress to raise the Treasury debt limit would spike corporate borrowing costs, wipe out $ 15 trillion in wealth and increase the number of unemployed by 6 million, Moody’s Analytics said, as a partisan deadlock on the debt ceiling persists, despite the prospect of a U.S. government default next month.
  • “A default would be a catastrophic blow to the nascent economic recovery from the COVID-19 pandemic,” said Mark Zandi, chief economist at Moody’s Analytics. “Global financial markets would be turned upside down, and even if they were resolved quickly, Americans would pay for this default for generations, as global investors would rightly believe that the federal government’s finances have been politicized.”
  • The default would force global investors in Treasury bonds to demand higher interest rates, exacerbating U.S. fiscal challenges and slowing economic growth, Moody’s Analytics said. Stock prices would fall by nearly a third, short-term funding markets would close, and interest rates on business loans, mortgages and consumer loans would rise.

Dive overview:

The Treasury has not been able to borrow money since August 1 and the reinstatement of a limit on US debt required by law. The Treasury paid the US bills using available cash. Those funds could run out on October 20, when the Treasury makes a payment to Social Security recipients exceeding $ 20 billion, Moody’s Analytics said.

Senatorial Minority Leader Mitch McConnell (R-Ky.) And other Republicans refused to support an increase in the debt ceiling, saying it would allow even more excessive spending by Democrats. Congress is considering a proposal from the Biden administration to spend $ 3.5 trillion on fight climate change and expand federal programs in health, education, child care and other social services.

“My advice to this Democratic government, the House and the Senate: do not play Russian roulette with our economy,” McConnell said at a press conference Wednesday. “Step up and raise the debt ceiling to cover whatever you’ve committed to throughout the year. “

Democrats say Republicans have an obligation to vote to increase the debt ceiling, noting that the national debt rose to nearly $ 8 trillion when Republicans controlled both houses of Congress under the Trump administration .

Republicans have accumulated billions of dollars in debt under Trump and are now demanding that American families bear the consequences of default, ”said Senate Majority Leader Chuck Schumer (DN.Y.) said yesterday. “It is nothing less than a dinner-and-dash of historic proportions.”

Throughout the debt limit standoff, leaders on both sides agreed that a US default – the first in history – would be catastrophic.

“A delay that calls into question the ability of the federal government to meet all of its obligations would likely cause irreparable damage to the US economy and global financial markets,” Treasury Secretary Janet Yellen said in a letter of September 8 in the leadership of the Congress of the two parties.

“At a time when American families, communities and businesses are still suffering from the effects of the ongoing global pandemic, it would be particularly irresponsible to endanger the confidence and credit of the United States,” Yellen said.

Budget battles between the Obama administration and Republican-controlled Congress in 2011 and 2013 created uncertainty that hampered business investment and hiring and slowed economic growth, Moody’s Analytics said.

Without the partisan bickering, by mid-2015 the gross domestic product would have been 1% higher and the unemployment rate would have been 0.7% lower, with 1.2 million more workers, Moody’s said.

Political uncertainty “is sure to increase in the coming days, making businesses more reluctant to invest and hire, entrepreneurs less likely to start businesses, and financial institutions cautious about granting credit,” Moody’s Analytics said. .



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