The Corner

The Cost of a Downgrade?

The ratings agenncies are what they are, and Wall Street forecasts are what they are, but this report (from Bloomberg) ought nevertheless to be food for at least some thought::

Political wrangling over a plan to reduce the deficit may cost the U.S. its AAA rating, adding $100 billion a year to government costs while dragging down economic growth, according to Wall Street bond dealers. A U.S. credit-rating cut would likely raise the nation’s borrowing costs by increasing Treasury yields by 60 to 70 basis points over the “medium term,” JPMorgan Chase & Co.’s Terry Belton said today on a conference call hosted by the Securities Industry and Financial Markets Association. Standard & Poor’s, which has given the U.S. a top ranking since 1941, reiterated on July 21 that the chance of a downgrade is 50 percent in the next three months and may cut the nation as soon as August.

“That impact on Treasury rates is significant,” Belton, global head of fixed-income strategy at JPMorgan, said during the call held by the securities industry trade group. “That $100 billion a year is money being used for higher interest rates and that’s money being taken away from other goods and services.”  

Of course, if what emerges from this process is a plausible rearrangement of the nation’s finances, all will be well, but that’s quite some if…

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