U.S. Downgrade May
Cost $100B a Year: JPMorgan By Michael J. Moore
and John Detrixhe | Jul 26, 2011 4:44 PM ET
Political wrangling over a plan to reduce the deficit may
cost the U.S. its AAA rating, adding $100 billion a year
to government costs while dragging down economic growth,
according to Wall Street bond dealers.
A U.S. credit-rating cut would likely raise the nation’s
borrowing costs by increasing Treasury yields by 60 to 70
basis points over the “medium term,” JPMorgan
Chase & Co.’s Terry Belton said today on a conference
call hosted by the Securities Industry and Financial Markets
Association. Standard & Poor’s, which has given
the U.S. a top ranking since 1941, reiterated on July 21
that the chance of a downgrade is 50 percent in the next
three months and may cut the nation as soon as August.
“That impact on Treasury rates is significant,”
Belton, global head of fixed-income strategy at JPMorgan,
said during the call held by the securities industry trade
group. “That $100 billion a year is money being used
for higher interest rates and that’s money being taken
away from other goods and services.”
Treasury Secretary Timothy Geithner has said the U.S. will
exhaust measures to avoid breaching its $14.3 trillion debt
threshold on Aug. 2. The government reached its borrowing
limit on May 16. President Barack Obama has threatened a
presidential veto of House Speaker John Boehner’s
two-step plan slated to be voted on tomorrow to raise the
U.S. debt ceiling and cut $3 trillion in government spending.
Yields Decline
Moody’s Investors Service on July 13 put the U.S.
on review for downgrade, while Fitch Ratings reiterated
July 18 that it would cut its rating on Treasury securities
if the government’s misses a debt payment. The “short-term”
effect on Treasuries of a downgrade would be about 5 to
10 basis points because few asset managers would be forced
to sell Treasuries, Belton said.
Yields on benchmark 10-year notes fell five basis points,
or 0.05 percentage point, to 2.95 percent today, according
to Bloomberg Bond Trader prices. That compares with an average
of 4.03 percent since 2001.
Senate Majority Leader Harry Reid said today in Washington
he was told by credit-rating companies his deficit-cutting
proposal would not prompt a downgrade of U.S. debt. Boehner
yesterday offered a two-step plan would raise the U.S. borrowing
limit by up to $1 trillion and later by $1.6 trillion while
requiring larger spending cuts, according to Republican
aides.
Reid Proposal
“Standard & Poor’s has chosen not to comment
on the many and varying proposals that have arisen in the
current debate,” John Piecuch, a New York-based spokesman
for S&P, said in an e- mail. “Any statement to
the contrary is inaccurate,” he said.
Reid’s proposal would cut $2.7 trillion in spending
and give Obama the full $2.4 trillion in additional borrowing
authority he seeks, enough to get through the 2012 elections.
Reid dropped Democrats’ insistence on tax increases.
The Nevada Democrat said today Boehner’s plan “gives
the credit agencies no choice but to downgrade U.S. debt”
and that the Senate will vote on his proposal soon.
“If we’re in a situation in which the U.S.
has effectively lost some of its long-term credibility,
particularly with overseas partners who are big buyers of
Treasuries, then that does make it that much harder to get
a long-term sustainable budget situation in place,”
Michael Hanson, senior economist at Bank of America Merrill
Lynch in New York, said during the conference call.
The U.S. unemployment rate rose for a third straight month
in June to 9.2 percent, pointing to an economy lacking momentum
entering the second half of the year. Employers added 18,000
workers to payrolls, the fewest in nine months and less
than the most pessimistic forecast in a Bloomberg News survey
of economists.
The concern stemming from a credit-rating downgrade “is
a negative for growth, and that’s an environment in
which investment and hiring is lower than it otherwise would
be,” Hanson said.