A long debt ceiling crisis could raise rates for borrowing, threaten recession


Never mind the politics behind the debate over increasing the debt ceiling. If the U.S. government eventually cannot pay all its bills, will it matter to households, consumers and the economy of Georgia?

The Atlanta Journal-Constitution in the past few days spoke to economists, as well as to budget, banking and finance experts, to get the answers.

The range of predictions has been wide — from nonevent to catastrophe — and among economic and budget experts there’s uncertainty about how a default crisis would play out. Some warn of a situation similar to the 2008 financial crisis sparked by the Lehman Brothers bankruptcy and collapse on Wall Street.

It may depend partly on how the Treasury Department spends whatever money it has. Can it pick and choose among debts and just pay the bills most likely to trigger economic turmoil? For example, could it just pay what’s owed on government bonds to investors, including other countries?

There are concerns that not making bond payments will force interest rates for government debt higher as investors demand greater returns for what they see as a suddenly risky investment. That could send many other rates higher, such as those for mortgages.

Will the financial markets panic, or just shrug?

Meanwhile, the government also faces many other bills, including those for Social Security, pay for soldiers and other employees, aid to state and local governments, and money owed to businesses fulfilling government contracts.

Amy Crews Cutts, senior vice president and chief economist at Atlanta-based credit rating company Equifax, said there have been serious defaults before — just not by the United States.

“The risk to individuals, I believe, is very, very large. The near-term implication is that some people may not get paid. Whether that’s bond holders or Social Security is irrelevant.”

This would be “as bad or worse than 2008. You’re going to see massive failures. … The value of the stock market falls. There’s an inability of firms to raise money. They cannot hire. Mortgage loans go bad. … There are job losses. It’s like a death spiral. It’s really ugly.”

As the economy stumbles, layoffs will mount, she said. “In the near term, people could be delinquent on payments. It could drop their credit scores 20 or 30 points. It eats their savings.”

Barry Anderson, deputy director of the National Governors Association, said he expects credit ratings agencies to downgrade the United States and interest rates to rise.

A former budget official under Presidents Carter, Reagan, Bush and Clinton, Anderson is skeptical about the ability of the Treasury Department to “prioritize” bill-paying.

“To pay one group, like bond holders or soldiers, and not pay another group? My understanding is that there is no legal authority that says he can do that.

“If we do default, the result would be an increase in borrowing costs for the federal government and for everybody, because the Treasury rates are the basis for everybody. It means an increase in the costs of mortgages, consumer borrowing, corporate borrowing, small-business borrowing. …

“There will be an impact on everybody. I don’t know how much. I do believe it will shake the financial system.”

Jenner Wood, chairman, president and CEO of SunTrust Bank’s Georgia/North Florida division, said he thinks the nation is teetering close to peril.

“I’ve got to believe that interest on our national debt will be paid. If Social Security were not paid, it would certainly impact a lot of people on fixed income.

“We could conceivably see a total collapse. We could certainly easily see a worldwide depression. …

“I would also worry how much is the currency worth if the government can’t fulfill its obligations.

“If we do not meet our debt obligations, it would be a whole lot worse than 2008 to 2012. … With liquidity drying up, it could ignite a very, very bad fiscal collapse. I think it’s bad news for all Americans. It’s beyond comprehension for the United States to not meets its obligations.”

Emily Sanders, managing director of United Capital in Atlanta, said the initial impact will be on government programs and consumers who need to borrow.

“Within Georgia there is a lot of federal spending, like (the Women and Infant Children) program and food stamps. The human cost of prioritization would be high. And then there is military spending and the CDC (the Centers for Disease Control and Prevention) — with lots of contractors. And we are not even discussing Social Security because I believe deep down those payments will be made.

“The rating agencies would downgrade U.S. debt. That would really have a snowball effect. And higher interest rates would certainly slow the housing market.

“And the biggest thing — I think this kind of got lost — was the Chinese premier saying that the U.S. should make sure it raises the debt ceiling. The Chinese are one of the biggest buyers of our Treasuries.”

Mekael Teshome, economist with PNC Financial Services Group Inc., said he doesn’t think hitting the debt ceiling is really a game-changer — at least locally.

“We will continue to see economic recovery in Atlanta even with a federal default. … The federal spending as a percentage of the Atlanta economy is pretty small. It’s 2.7 percent.”

Teshome said he also believes Social Security checks will be made a priority.

That doesn’t mean there won’t be big changes, he said. Congress would “spend only what it has. Government will have to prioritize. Where the cuts will happen is things that we haven’t already borrowed for. Employees and day-to-day spending. We’ll have to cut head count.”

But with so much riding on politics, and the situation unprecedented, forecasting is a lot like guessing, he said. “At this point, it’s a little too much speculation.”

Raymond Hill, senior lecturer in finance, Goizueta Business School at Emory University, said he frets mostly about how long any default lasts.

“If it does go on more than a few weeks, there is no way to manage and prioritize it. … You cut government spending and that’s a reduction of aggregate demand in the economy. It would have a very recessionary effect. …

“If I own a restaurant, what happens in the financial markets may not change anything for me, but if there’s a financial crisis and a real cutback in spending, in three months I’ll sure see it.”

Thomas “Danny” Boston, Georgia Tech economics professor, said the impact will be “drastic,” mainly because interest rates will rise.

“But the damage is already being done. There’s been record disinvestment from U.S. assets in the past month. That leads to a lower value of the dollar, higher interest rates and, ultimately, other countries will be less likely to use the dollar as a currency. …

“It will happen incrementally, not all at once. We will see it unfolding over several months. Think of it as a fiscal stimulus in reverse. It might take six months to see the full effect. The most telling signs will be higher unemployment.

“There will be layoffs, cuts in spending, spiking interest rates that will stop homebuying and auto purchases. There will be losses in confidence and cutbacks in corporate investment.”

David Agrawal, professor of economics, University of Georgia: “The government deficit is about 4 percent of GDP (gross domestic product) and if we stop spending money, that is likely to make the economy contract. It could put us into recession. That’s 4 percent of GDP going immediately to zero.

“You’ll get spikes in unemployment. You’ll get declines in income.”

The economy is already weaker than during a typical recovery, he said. “The contraction would definitely have repercussions for the everyday people around Georgia.

Terry McEvoy, managing director at Oppenheimer & Co. and a bank analyst, said interest rates are headed up — bad news for potential homebuyers, as well as homeowners who want home equity loans.

“There could be a slowdown in lending.

“Who knows how the American consumer psyche works when you have these types of headlines? The longer it goes, the greater the level of uncertainty.

“If you are a small-business owner, you run a major corporation, would you want to make an investment in your business? You’re taking a risk. The risk-reward under this scenario would cause a more cautious stance.

“I don’t want to paint such a dire scenario. I don’t want to say we could get back there (2008) because, who knows?”


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