Why Raising the Debt Ceiling Might Not Be Enough

By Eliza

Jul 12, 2011 3:39pm

ap mitch mcconnell debt jp 110712 wb Why Raising the Debt Ceiling Might Not Be Enough

ABC News’ Dan Arnall (@abcmoneyguy) reports:

Congress has so tangled itself in the thorny vines of its partisan divisions  that even if it does find a way to raise the debt ceiling ahead of an August 2nd deadline, that might not be enough to satisfy global markets and credit ratings agencies.

While it’s obvious that some members are trying to figure out a way back from the ledge of default, they might be too close to the edge to back away now.

All this talk about fiscal responsibility has set expectations in the global markets (and probably on Main Street, too) that Congress and the Administration are going to actually make some tough choices and make headway on getting Uncle Sam’s financial house in order.

If they don’t make real headway, the Federal government might get dinged by the ratings agencies even if they succeed in increasing the debt limit and avoiding technical default.

Standard & Poor’s hinted that real deficit/debt reform (not just a debt limit increase) is needed when they revised its outlook for U.S. ratings to negative in April:

“Some compromise that achieves agreement on a comprehensive budgetary  consolidation program–containing deficit-reduction measures in amounts near those recently proposed [ed: $4T], and combined with meaningful steps toward  implementation by 2013–is our baseline assumption and could lead us to revise the outlook back to stable,” writes S&P. “Alternatively, the lack of such an agreement or a significant further fiscal deterioration for any reason could lead us to lower the rating.”

The warning shots from Fitch Ratings and Moody’s sound similar notes.

It would not be surprising to see Fed Chairman Ben Bernanke asked about this escape hatch during his semi-annual testimony on Wednesday on Capitol Hill. In June, the Chairman offered these words of advice (echoing several years of calls for fiscal changes):

“The solution to this dilemma, I believe, lies in recognizing that our nation's fiscal problems are inherently long-term in nature. Consequently, the appropriate response is to move quickly to enact a credible, long-term plan for fiscal consolidation. By taking decisions today that lead to fiscal consolidation over a longer horizon, policymakers can avoid a sudden fiscal contraction that could put the recovery at risk. At the same time, establishing a credible plan for reducing future deficits now would not only enhance economic performance in the long run, but could also yield near-term benefits by leading to lower long-term interest rates and increased consumer and business confidence.”

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