We read here that John Chambers, managing director of sovereign ratings at Standard & Poor’s, talks about the outlook for U.S. lawmakers to reach an agreement to raise the debt limit and avoid an S&P downgrade of the sovereign top-level AAA ranking on the U.S. to D.
- If any government doesn’t pay its debt on time, the rating of that government goes to D
- We are talking about the sovereign rating of the US government
- If you get to the situation where the government hasn’t paid its debt, you will have very serious disruptions throughout the money markets, in the repo markets, the foreign exchange markets and the bond market.
- It will be much more chaotic than September 2008 [collapse of Lehman].
- This also supports our view this will not happen. The policy makers will understand that.
- They [the government] can prioritize payments and that would not be a default by definition. However, you would have to contract payments in a massive way overnight. And that would have a very sharp negative fiscal impulse to the economy
- Government has raised the debt ceiling 78 times, many times at the 11th hour but later on the month of July, Democrats and Republicans will reach a compromise.
It is interesting to see the statement “policy makers will understand”. We are talking about Congress here.