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Stalled Debt Ceiling Debate Will Have Catastrophic Effects

by Trevor Hayes, published


Following the last minute deal approved by the Republican-led House of Representatives regarding the fiscal cliff and tax changes, politicians in Washington are now looking forward to the next round of deadline driven negotiations, chiefly the need to raise the debt ceiling.

House Republicans have fully acknowledged that it is widely accepted that they lost the negotiations over the fiscal cliff by allowing the president to raise taxes on the wealthiest Americans while receiving very little in return -- be that through tax cuts or budgetary reforms.

Many Republicans will be pushing for a partial government shutdown, which could result in the U.S. defaulting on some of its debt payments. President Obama has made mention of the upcoming round of negotiations by saying,

"While I will negotiate over many things, I will not have another debate with this Congress over whether or not they should pay the bills that they've already racked up through the laws that they've passed. We can’t go down that path again."

The American people can expect the fight over the debt ceiling to play out just as it did just this last year, but what is unclear is if this new battle will have any effect on the United States credit rating.

In 2011, Standard & Poor's, one of the three largest credit rating agencies in the world, downgraded the United States credit rating from AAA to AA+. While Moody's Analytics and Fitch have remained firm in maintaining a AAA rating for the United States, that could change following a lengthy fight over whether or not the United States will make good on the debt it has accrued.

As many economists have pointed out, these three credit agencies can have a massive impact on market sentiment.

The financial market is highly based in sentiment and outlook. When one of these major credit rating agencies changes the outlook for an entire country even slightly, it can have drastic effects on the market as many American investors found out last year.

Should this new round of debt ceiling negotiations give way to a further downgrade of the nation's credit rating from Standard & Poor's, or another rating agency like Fitch follows suit in the downgrade, the impact could be catastrophic.

Given the current Congress' history of partisan squabbling over the debt ceiling, it is not unreasonable to suggest that these agencies are beginning to view the United States in a less favorable light in regards to its willingness to pay back its debt.

The behavior of the representatives directly impacts this view. In the past, Moody's has threatened to review America's AAA rating if a deal could not be reached regarding the debt ceiling, this round will be no different.

Critics have been quick to point out that the clout these credit agencies wield is far too great, which should come as a warning to the current Congress.

Should it fail to come to a deal, not only will the United States and its citizens be looking at a partial or even total government shutdown, as well as a default on its debt payments, but the long term effects of further downgrades to the country's credit rating will be unbearable to an already struggling economy.

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