John Boehner has delayed today's scheduled vote on his controversial Cap, Cut, and Balance bill, due to lack of support from Teaparty Republicans. Senator Majority leader Harry Reid says it doesn't matter because the Boehner bill will not pass the Senate, and sources said the President would veto it if it did. So Wall Street is growing increasingly concerned that Washington politicians will be unable to pass an extension of the debt-ceiling by the August 2 deadline. Two articles illustrate these concerns.
Nathaniel Popper and Jim Puzzanghera, of the Los Angeles Times, write Debt-ceiling threat has Wall Street scrambling.
The Dow Jones industrial average fell for a third day in a row Tuesday, the dollar slumped and gold hit a new high amid increasing jitters that President Obama and Congress won't reach an accord to lift the debt ceiling in time.
Without a deal, the most feared scenario is that the U.S. will miss payments on its bonds and default — which financial experts say would be disastrous. "No one … could possibly say that there is no chance of a catastrophic outcome," JPMorgan Chase & Co. CEO Jamie Dimon told analysts last week.
The more likely scenario that investors are preparing for is that a temporary deal is struck to lift the debt ceiling. But such a makeshift plan is unlikely to allow the U.S. to maintain its AAA grade with bond rating companies. Citigroup analysts say the odds are 50-50 that the U.S. will be demoted to an AA rating for the first time ever.
European stock markets are down about a half of a percent over night.
Such a downgrade could lead to a temporary market panic. In the longer term it could push interest rates up for everyone from bankers down to ordinary people taking out car loans, and weaken the dollar's position as the world's reserve currency.
And, in another article, The Huffington Post reports an Associated Press story, that a U.S. Credit Rating Downgrade Looking Likely Even If Debt Ceiling Deal Is Reached
NEW YORK -- Could the U.S. lose its top credit rating even if a deal is reached to raise the debt limit? Market analysts and investors increasingly say yes. "At this point, we're more concerned about the risk of a downgrade than a default," said Terry Belton, global head of fixed income strategy at JPMorgan Chase.
Even with a deadline to raise the U.S. debt limit less than a week away, many investors still believe Washington will pull off a last-minute deal to avoid a catastrophic default.
But at least one credit rating agency has already made it clear that unless that agreement includes at least $4 trillion in budget cuts over the next decade, the country's AAA rating could be lost. Right now, the proposals under discussion cut around $2 trillion or less.
Standard & Poor's warned earlier this month that there was a 50-50 chance of a downgrade, if Congress and President Obama failed to find a "credible solution to the rising U.S. government debt burden." S&P said it may cut the U.S. rating to AA within 90 days. Passing a $4 trillion agreement could prevent a downgrade, S&P said.
The other chief rating agency, Moody's Investors Service, said the U.S. government would likely keep its top rating if it avoids a default.
The consensus view still seems to be that Washington leaders will somehow manage to come together to prevent a default, but time is running out.
And, sadly, many economist such as Robert Reich, Paul Krugman, and Joseph Stiglitz believe we are in a demand and employment crisis, so any cuts to government spending are going to make things worse for the economy, perhaps even putting the economy into a double dip recession, or what Krugman warns could be a 'lessor depression."
A wiser approach would be to cut defense spending back to Clinton era levels and repeal the Bush tax cuts but this is not even under discussion.