Credit rating could suffer if Congress fails to raise debt ceiling
There’s a difference between being unable to pay your bills and being unwilling. It’s the difference between Greece and the United States.</p><p>Governments in both countries face August deadlines to avoid potentially defaulting on part of their national debts. And that’s about where the similarities end.</p><p>Greeks have taken to the streets in violence. The prime minister offered to resign – and then not to resign – in his push for a rescue plan. The battle is over how much economic pain Greece must bear for a second European-financed bailout.</p><p>Uncle Sam, on the other hand, can avoid default simply by agreeing to pay his bills. He’ll have no problem getting the money.</p><p>But keeping current on the national debt has hit a political roadblock that the U.S. Treasury says needs to be cleared by Aug. 2 if it’s going to make ends meet.</p><p>No one really knows what would happen if Congress doesn’t raise the U.S. debt ceiling and the government lets a debt payment or two slide. It simply hasn’t happened before.</p><p>However, just waiting for congressional action is expected to drive up interest rates, not only for Uncle Sam but also for every homebuyer, car shopper, corporation and small business. </p><p>The closer America gets to Aug. 2 without resolving its debt deadlock, the more that bankers, investors, money managers, foreign governments and others will begin to think about the unthinkable. </p><p>Could the safest investment in the world go sour?</p><p>“I don’t think it can happen because the consequences are so great,” said Hank Herrmann, CEO of the Overland Park-based mutual fund company Waddell & Reed Financial Inc.</p><p>A U.S. default could mean another financial crisis on top of the 2008 crisis. It’s more than enough reason to work out a solution.</p><p> “Nobody expects a real meltdown,” said Chris Kuehl, managing partner of Armada Corporate Intelligence in Kansas City, Kan. “But there could be enough confusion to cause some heartburn for a week or two.”</p><p><strong><span class="subhead">Tapped out</span></strong></p><p>There is a reason the U.S. Treasury owes the rest of the world $14.3 trillion. It’s the safest borrower on the planet.</p><p>The Treasury gets its financial stamina from the U.S. economy, still the largest in the world. And the whole world does business in U.S. dollars, which is what Treasury debts mature into. Besides, the Treasury prints the dollars.</p><p>Lenders are so sure Uncle Sam will pay off his debts on time that they charge only enough interest to make up for expected inflation and a little profit. There’s no extra tacked on for fear the U.S. won’t pay.</p><p>Everybody else pays a premium to borrow, depending on how much of a credit risk they’re seen to be.</p><p>Practically everyone is willing to buy more U.S. Treasury bonds, notes and bills, despite all the debt America already owes, its weak economic recovery and swirling threats to its highest of all credit ratings.</p><p>But Treasury’s not selling now. It’s hit the debt ceiling. </p><p>Congress sets a borrowing limit on the Treasury to control how much debt the country can go into. America’s is the only government to do so.</p><p>Greece’s government, for example, can borrow all the money it wants, or more precisely, all the money it can. Its problem is that lenders don’t expect to collect fully on the Greek bonds and aren’t about to add to their holdings.</p><p>America, on the other hand, can turn on the credit tap itself by letting the Treasury sell more securities. Congress would just raise the debt ceiling, as it has many times in the past, often routinely.</p><p>This time, however, some lawmakers won’t agree to raise the debt ceiling until Congress agrees to major budget changes to slow down the nation’s accumulation of debt. At $14.3 trillion, it’s threatening to eclipse the size of the nation’s annual economic output or possibly grow out of control.</p><p>Other lawmakers are willing to make budget changes too, but in different areas or amounts. The debate drags on as Treasury’s deadline nears.</p><p>“Aug. 2 is important. Anxieties will increase,” said Bob Gahagan, a senior vice president in the Mountain View, Calif., offices of American Century Investments. “It’s been drawn as a line in the sand whether we’re going to be serious about our debt situation in the U.S. It really isn’t, but that’s what it’s come down to.”</p><p>Washington’s pristine credit score depends on resolving the debt ceiling and budget problems. </p><p>In April, Standard and Poor’s Corp. said its outlook on the nation’s AAA rating had turned “negative” rather than “stable.” It doesn’t expect agreement on a long-term plan to curb U.S. debt before 2013. </p><p>Earlier this month, Moody’s Investors Service focused on the “small but rising risk of a short-lived default” because of inaction on the debt ceiling. Unless Congress shows progress “by the middle of July,” Moody’s promised to review Uncle Sam’s AAA rating “for possible downgrade.”</p><p>Kuehl said that effectively sets a new deadline somewhere during the second week of July. Failure to act by then, he said, may signal to markets that Congress won’t have enough time left.</p><p>“Will we wait until it becomes an emergency before we act?” he said. “It’s looming. We’re getting very close to it.”</p><p><strong><span class="subhead">Debt watch</span></strong></p><p>So far, financial markets have barely raised an eyebrow.</p><p>Instead of shunning U.S. Treasury securities, investors have been bidding up the prices on exiting 10-year Treasury bonds. That means they’re willing to take a smaller interest rate on new bonds from Uncle Sam even as the debt- ceiling deadline approaches.</p><p>The 10-year Treasury rate is under 3 percent, down from 3.5 percent in February.</p><p>A weaker economy tends to drive down U.S. interest rates, and recent reports show the recovery has hit a soft spot.</p><p>Greece also accounts for some of the enthusiasm for U.S. debt. A Greek default would hurt the large German and French banks that hold much of its debt. It also might lead to similar steps by debt-laden Ireland, Portugal or Spain, which would cause even greater economic havoc.</p><p>In the face of such uncertainty, investors are again moving toward safety, and it’s clear they still consider U.S. debt a safe haven.</p><p>This isn’t to say that Congress can ignore the Aug. 2 deadline without jeopardy.</p><p>Real damage could come from how investors behave in anticipation of a default.</p><p>Expect big buyers and holders of U.S. Treasury debt, China for example, to start making some “ugly noises” by mid-July, Kuehl said. They might threaten to dump U.S. Treasuries, or even sell a few billion dollars worth to register their discontent.</p><p>The impact would be upward pressure on interest rates for U.S. Treasuries, higher borrowing costs for everyone else and trouble for the economy.</p><p>Kuehl expected to see Treasury rates climb even if there were no debt ceiling problem. That’s because one big buyer of Treasury debt already has said it will stop buying at the end of this month.</p><p>The Federal Reserve has been buying U.S. Treasury securities under its second round of “quantitative easing” policy to boost the economy. It previously set June as the last month of the buying program.</p><p>Kuehl said this expected rise in rates will be something of a test to see whether financial markets see the Fed’s exit as the cause, or whether they blame concerns about the debt ceiling for pushing rates higher.</p><p>Such pressures would build until Congress comes up with a higher debt ceiling and grow “exponentially” as the Aug. 2 date approached, said Gary Cloud, co-chief investment officer for fixed income investments at Financial Counselors Inc. in Kansas City.</p><p>But Cloud has “zero fear” of a default because lawmakers won’t want to face voters in the wake of one. “At some point your political scalp trumps your ideological scalp,” he said.</p><p><strong><span class="subhead">Technical default?</span></strong></p><p>Some in and out of Congress have argued that a one- or two-day default by the Treasury could help force Washington to curb its debt habit. And they see no lasting damage.</p><p>Others argue that such a technical default could disrupt markets and economic activity in unpredictable ways.</p><p>“The system’s not ready for it. Nobody knows for sure what would happen,” said Eric Jacobson, a director of research on fixed-income investing at Morningstar Inc. “It’s very hard to handicap how it will affect investors globally.”</p><p>An April report by analysts at JPMorgan said a technical default “raises the risk” that investors would withdraw from money market funds that hold government securities. A technical default “would not automatically trigger selling,” it said, but could change the funds’ willingness to buy some other types of government securities and possibly disrupt those markets.</p><p>Gahagan said he would still expect interest rates to rise sharply after a technical default in which the Treasury quickly made up missed payments. </p><p>Herrmann said confidence would erode quickly and stock prices would follow. He’s also worried about the damage Congress is doing by failing to raise the debt ceiling and erase talk of a default.</p><p>“Every day you do that you weaken people’s sense of confidence in our nation’s debt securities,” Herrmann said. “You come in every day hoping they finally get it.”</p><p>Moody’s has said it would likely cut the United States’ credit rating shortly after a default caused by the debt ceiling. How deep and lasting the cut would be depends on how quickly the default was cured, how much the default might drive up U.S. borrowing costs, and whether Congress set up measures to prevent another default, Moody’s said.</p><p>The world also is less likely to trust America to control its debt habit if it allows the debt ceiling to blemish its until-now pristine credit rating. </p><p>Gahagan said he is focused not on Aug. 2 but on the deal Congress strikes to raise the debt ceiling. He wants to see resolve on spending constraints and meaningful progress on controlling looming future entitlement costs. </p><p>“The last thing we would want is to be compared to Greece. And there’s no reason for it,” Gahagan said.
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Anxieties will increase,” said Bob Gahagan, a senior vice president in the Mountain View, Calif., offices of American Century Investments. “It's been drawn as a line in the sand whether we're going to be serious about our debt situation in the US It
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American Century Investments Launches New Blog Featuring Market ...
Kansas City, Mo. (Vocus) October 7, 2010
Investors, clients and prospects seeking market commentary and insights from American Century Investments experts now have a new option. The investment management firm has launched a blog — http://www.americancenturyblog.com –featuring authored content by the companyâs chief investment officers, portfolio managers, CFA charterholders and other investment professionals. Displayed in a familiar blog format, the expert commentary provides relevant content relating to the markets, investing and economic trends.
âGiven the current economic challenges and continued market volatility, investors and clients are actively seeking the perspectives of respected investment experts,â said Jennifer Sussman, director of online marketing and experience for American Century Investments. âThe new blog provides a centralized, easy-to-use platform for accessing our proprietary content and insights, which we believe will help us enhance our customer relationships and better engage prospects and others interested in our unique investment point of view.â
Despite recent growth in other forms of social media, blogs remain very popular with internet users. Digital media research and analysis firm eMarketer estimates that this year, 51 percent of internet users in the United States will read blogs at least monthly and by 2014, readership will rise to more than 60 percent, or approximately 150 million people.*
Standard features of the American Century Investments blog include weekly market recaps and analysis of significant economic events; quarterly insights from American Century Investments Chief Investment Officer (CIO) Enrique Chang and the six discipline CIOs; the ability to perform content searches by specific topics or keywords; and an interactive tool for rating the quality of blog content. The blog also has links to the companyâs primary website http://www.americancentury.com and Twitter account http://www.twitter.com/AmericanCentury.
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