U.S. Avoids Default: President Signs Legislation to Reduce the Deficit and Increase the Debt Limit
admin | Thursday, August 4th, 2011 | No Comments »President Obama signed legislation raising the debt limit into law on August 2, 2011. This legislation was approved by the House of Representatives with a vote of 269 to 161 and by the Senate with a vote of 74 to 26. Collective relief was felt domestically and internationally that the U.S. avoided default. However, the agreement does not reduce the budget deficit enough to allay the concerns of the rating agencies or other countries.
- Moody’s Investors Service and Fitch Ratings confirmed the U.S. AAA rating after the passage of the debt deal. Standard & Poor’s has indicated the U.S. rating is still under consideration.
- BlackRock believes that the possibility of a U.S. ratings downgrade has decreased substantially, but indicated that the effects of a downgrade would be felt throughout the markets according to a report from Channel NewsAsia on August 3, 2011.
- The head of China’s Central Bank “welcomed the passage of the bill that avoided a U.S. default but called on the U.S. to adopt ‘responsible measures’ to manage its debt issues and pledged to continue diversifying China’s dollar-dominated currency reserves” reported the Wall Street Journal on August 3, 2011.
- Dagong Global Credit Rating Co., a Chinese rating agency, “lowered its rating on U.S. sovereign debt from A+ to A with a negative outlook” since the debt deal does not address structural deficit issues according to the Wall Street Journal on August 3, 2011.
A downgrade in the U.S. rating could occur eventually as a result of a combination of factors including a slow growth outlook, insufficient deficit reduction, and/or increasing U.S. borrowing costs. According to a SIFMA estimate, a downgrade could potentially increase Treasury yields by 60 to 70 basis points and add as much as $100 billion to the U.S. funding costs annually. http://www.sifma.org/news/news.aspx?id=8589934908
