Tuesday, July 26, 2011

Economics:  How Bad Would Default Be for U.S. Creditworthiness?

First, would the United States "go into default" if the debt ceiling isn't raised?

And second, would the U.S. lose its "full faith and credit?"

On the first question, our experts largely agreed that -- contrary to Bachmann's implication -- a failure to pay any of its bills, not just interest to bondholders, would be classified as a default.

Lawrence J. White, an economist at New York University's Stern School of Business, said that "if the federal government delays payment to anyone, then certainly in a common-sense sense, the government has defaulted on its obligations."

Neil H. Buchanan, a George Washington University law professor who specializes in economics, agreed.

"If the government fails to pay any obligation on schedule, that is a default in both the common-sense meaning and in the legal sense," Buchanan said. "The person to whom money is owed has not been repaid. That's a default."

What about the second claim from Bachmann, that the U.S. wouldn't lose its "full faith and credit" in the event the debt ceiling isn't raised?
While several experts we contacted pointed out that market players are not monolithic in their views, we found strong evidence that Bachmann was wrong ....
"Foreign holders of Treasuries will understand that it is politically untenable to pay foreigners but not Americans," he said. "Can you imagine the firestorm if Americans were told that we cannot afford to pay Social Security recipients, because we have to pay foreign banks and governments first? The argument that we must do so to protect our credit rating will sound an awful lot like ‘too big to fail' -- the same argument that said that banks in 2008-09 had to be bailed out, while homeowners and unemployed workers were thrown to the wolves. No matter how strong the argument that doing so is necessary to protect our credit rating, the bottom line is that the government would be favoring foreigners over Americans. Any foreign investor would know that this is not politically sustainable. They would have every reason to dump our bonds, or at least to require much higher rates of return."

For more, see How Bad Would Default Be for U.S. Creditworthiness? by Louis Jacobson, July 16, 2011 at PolitiFact.

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