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June 09, 2011

Rating agency warns of junk US bonds

Maybe this will convince them it is not imaginary?

Some Republican lawmakers have said a brief default, which would be inevitable in August if lawmakers fail to raise the nation's $14.3 trillion debt ceiling, might be acceptable if it forces the White House to deal with large budget deficits....

Fitch said it would first place ratings on "watch negative" if lawmakers failed to enact an increase in the debt ceiling by August 2, when the Treasury will have run out of extraordinary measures to avoid a default.

The first test for ratings will come two days later, when $30 billion worth of Treasury bills mature. If the government fails to repay them in full, Fitch will lower the rating on those specific securities to B-plus, four notches into junk territory.

But the real deadline comes on August 15, when $27 billion in Treasury notes and $25 billion in coupon payments come due. If the government misses those, Fitch would downgrade the sovereign issuer ratings to "restricted default" and lower all Treasuries securities to B-plus.

"Though such an event (such as a short-lived Treasury bill default) may not permanently impair the capacity of the government to service its obligations, it is unlikely that its 'AAA' status would be retained in the short to medium term," Fitch said.

Coincidentally, the size of the limit increase is the same we will earn back in the next decade by allowing the Bush tax cuts to expire in 2012, if no action is taken. A move the same Republicans oppose.

Posted by Mike at June 9, 2011 05:23 PM

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