The most obvious impact of a failure to agree on raising the debt limit is that it could lead to a default. This would happen if the U.S. Treasury delayed interest or principal payments on Treasury securities. A technical default would occur if the Treasury failed to make payments when due on its non-interest obligations, such as to government contractors or to recipients of entitlements such as Social Security.
A default would be unprecedented and would likely have significant global market and economic repercussions. The greatest one would be damage to U.S. credibility. We caught a glimpse of this in 2011 during a previous debt ceiling debate when Standard and Poor’s, a major ratings agency, downgraded its U.S. credit rating, citing among other things a diminished “predictability of American policymaking.”
But should the United States default, it would no longer be able to fully reap the benefits—notably, financing on the best possible terms—bestowed on the most reliable debtors. The government’s own financing costs, borne by taxpayers, could increase. And since broader borrowing costs are pegged to Treasuries, interest rates would likely also rise for businesses, homeowners, and consumers.
Stocks would probably be pressured as higher rates made companies’ future cash flows less predictable. Spillover effects to global markets and economies would be likely. Such developments occurring at a time when global recessionary risks are already increasing make averting such a scenario even more important.
To be clear, we don’t doubt for a minute the government’s ultimate ability to pay its obligations. Our assessment of the minimal credit risk posed by the United States is supported by its strong economic fundamentals, excellent market access and financing flexibility, and favorable long-term prospects, along with the dollar’s status as a global reserve currency.