Asset Based Loan

Another credit downgrade coming with debt ceiling fights?

Will an exploding national debt in 2021 trigger a US government credit downgrade?

Covid-19 and government stimulus programs have instantly added trillions of dollars to the U.S. national debt in just the last year. No one really knows how much longer can this go on before there is a credit downgrade or market driven interest rate increases.

In recent years, the treasury department took extraordinary measures by moving money around to meet the government’s commitments.  Congress finalized lists of requirements they demanded that the administration meet in order to ensure cooperation.   However, bond rating agencies didn’t care much.

They stated that another round of fights may trigger a further credit downgrade of U.S. Treasuries.   Is another credit downgrade coming with the upcoming debt ceiling fight?

Counter arguments have been made by some U.S. politicians that not increasing the debt limit will not be a crisis. How? They say Congress could authorize payment of principal and interest on existing U.S. debt, while not paying obligations in other areas.  

However, bond rating agencies such as Fitch has indicated that such a ploy will basically be considered a thinly veiled default and may still trigger a review of the Government’s credit rating.   Their view is that such a move is nothing more than debt prioritization. It pays certain obligations but not others, and is just another term for default.

Politicians have already shown that they are willing to use the debt ceiling as a political weapon at the expense of the nation’s credit.

Compromising to save the nation’s credit rating does not seem to be a concern. The nation’s credit deserves far better than this from both parties.  It appears that the more extreme wings drive the debate to a head.

Another major danger in this type of fighting is that the debt limit has to be increased roughly every year. This is because it is only increased a relatively small percentage after each fight is settled.

If the branches of Government authorize ongoing increases by an already agreed to plan, these credit downgrade threats would largely go away.

The national debt problem will have to be addressed at some point. Until then, missing payments and threatening default make the problems worse.

Asset Based Loan

How a Government Credit downgrade affects services

There is currently little awareness, or interest,  if and how a Government credit downgrade affects all services that the Government can provide.

In both the short and long term, a Government credit downgrade has a significant affect on the services Government can offer to society, mainly in a reduction of those services.    One need only look at Greece to see the nightmarish affects of many downgrades in credit, to the point where Government issued bonds going into junk status.

When the Government suffers a down grade in it’s credit rating,  it may be foreced to offer a higher rate of interest on the securities it issues to attract capital investors.   Currently, the Government pays approximately 12% of the revenues it takes in to investors through the Government Treasury bonds it has issued.    This means that the Government is now using approximately $300 billion per year to pay interest owed.   The public receives no benefit from this money.   It is, in essence, completely wasted money.  If there is another credit downgrade, or several downgrades, it may force the Government to pay a higher rate of interest on the same Treasury bonds to attract the same investors.

If an extra 1% in interest is paid, this is very significant because it is likely to be a permanent increase rather than a temporary or fluctuating  increase.    In order for the interest payment on bonds to go down, the credit rating issued by Moody’s and Standard and Poor’s would have to be upgraded.    Considering the Government’s large and consistent budget deficits, this scenario is unlikely, especially in the short term.    The extra 1% paid in  interest will represent approximately $10 billion dollars per year, each year, ongoing for those Treasuries issue in that 1 year.   If this is done each year, with a budget deficit of $1 trillion, this is approximately and extra $10 billion every year, on top of the previous year’s trillion.

So how does this affect or decrease services?

This is money that the Government cannot now use, that is previously did use, to fund any services or benefits, including Medicare, Social Security, Education, Military, Highway, unemployment, job training, or any other areas of the budget.   Every year that the Government says it has to reduce the benefits to Medicare and Social Security because of limited funds, those funds that are now being paid in interest could have been used to fund these programs, rather than cut them.    A future post will focus specifically on the dollar amounts per year.