Despite expressing confidence that the U.S. will avoid a default, one top credit rating agency has issued a quiet warning that the nation's AA+ rating will plunge suddenly to a shockingly low D if a political resolution does not come in time to prevent the Treasury from missing a debt payment in the next month.
Standard & Poor's Corp., the oldest Wall Street rating firm and the same one that previously triggered a global market rout in August 2011 by being the first to downgrade the U.S. from AAA, is now saying the next step for the U.S. will not be another minor notch down, as occurred last time, but rather be more like falling off the cliff altogether.
Its casual and unpublicized warning, buried deep in an explainer on the government shutdown, underscores how unexpected and even unthinkable dangers lurk in the background as the Congress and the White House flirt with allowing the Treasury to run out of borrowing room this week.
Various proposals to forestall default at least for a few weeks have emerged in Congress, though none appears to have the votes to pass. The fervent last-minute efforts by congressional leaders ahead of Thursday's "drop dead" deadline laid down by the Treasury illustrate why S&P and other rating agencies say they are confident that the Treasury will be rescued from default through an eleventh-hour deal.
But any short-term deal would only postpone the day of reckoning on the debt while setting up another deadline and likely political confrontation later this year or next.
S&P's quiet warning likely influenced the administration and lawmakers to finally start negotiations on Friday. Markets reacted violently to S&P's first, more minor downgrade in 2011, with the Dow Jones industrial average plummeting by more than 1,000 points. The wholesale collapse of the U.S. rating being suggested by S&P this time around, after earning what was once the highest rating of any government on Earth, is not something most investors have prepared for or even contemplated could ever happen.
But the Treasury and many analysts are pointing out that the margin for error grows so thin once the Treasury exhausts its borrowing authority that a minor mistake or miscalculation by Congress or Treasury's bean-counters -- say on figuring how much cash they have on hand to make a scheduled debt payment -- could plunge the nation into an accidental slip-up with calamitous consequences for the global economy and financial markets.
Treasury Secretary Jack Lew highlighted the potential for a monumental miscalculation, one that could be precipitated by outside investors, in testimony before Congress on Thursday. He noted that even when the Treasury has exhausted its authority to borrow above the current limit, it must continue to roll over or refinance $100 billion of existing U.S. Treasury bills each week.
"We are relying on investors from all over the world to continue to hold U.S. bonds," he said. Nations such as China and Japan are given the opportunity to keep buying bonds each week, but they also may choose to sell them. Already some investors are starting to shun them out of concern about a default, causing the rates on short-term notes to rise. "If U.S. bond holders decided that they wanted to be repaid rather than continuing to roll over their Treasury investments, we could unexpectedly dissipate our entire cash balance" and be forced into default within days, Mr. Lew said.
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