The last time the U.S. almost defaulted on its loans, the consequences were expensive
The last time the U.S. almost defaulted on its loans, the consequences were expensive
House Speaker Kevin McCarthy took to Wall Street on Monday for a speech on the debt ceiling. That’s the maximum amount the Treasury Department can borrow to pay its bills.
Speaking at the New York Stock Exchange, McCarthy said that “defaulting on our debt is not an option.” But neither McCarthy nor the White House are showing any signs of compromising. This year’s gridlock is reminiscent of 2011, when we also went down to the wire.
Defaulting on the U.S. debt 12 years ago might have actually been an option for some politicians, and 2011 was a turning point for world markets, said Laura Blessing, a senior fellow at Georgetown University.
“As they have woken up to the very real danger of us you know, kind of juggling with hand grenades on this one,” she said.
In response, the credit rating agency Standard and Poor’s downgraded U.S. creditworthiness from the highest rating — a triple A — to double A plus. Now, you may be thinking, “Big deal. We still got an A.” But in fiscal 2011, the U.S. paid about $1 billion more to borrow money, according to the Government Accountability Office.
And there’s still a hangover, said Susan Irving, a senior advisor at the GAO. “I think where you see the lasting effect is in nervousness about the treasury market,” she said.
Treasury bills, those IOUs the U.S. issues. Irving saw that lasting effect in 2013 when there again was a stalemate over raising or suspending the debt limit. Nervous investors demanded a higher interest rate, Irving said — and some just said forget it.
“And the, what we call ‘bid to cover’ — the number of requests to buy compared to the amount you’re selling — dropped,” she said.
The Bipartisan Policy Center said the 2011 and 2013 debt limit debates drove up the cost of government borrowing. And Rachel Snyderman, an economist at the Center, said that’s happening again.
“Because of the inherent risk that financial markets see surrounding a potential debt limit debate this summer,” she said.
Snyderman estimates if Congress doesn’t raise or suspend the debt limit, the U.S. could run out of money to pay its bills by this summer or early fall.
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