SINGAPORE/WASHINGTON — The possibility that the United States could default on its debt — if only for a few days — is starting to alarm the global community even as the idea gains favour among Republicans as a way to force Washington to cut runaway spending.
Fitch Ratings agency warned Wednesday that U.S. treasury bonds, seen worldwide as a risk-free investment, could be labelled “junk” if the government misses debt payments by Aug. 15.
Meanwhile, an advisor to China’s central bank said U.S. Republican lawmakers are “playing with fire” by contemplating even a brief debt default while a prominent Fed official said the reverberations in global markets would be “very severe.”
The idea of a technical default — essentially delaying interest payments for a few days — has gained backing from a growing number of mainstream Republicans who see it as a price worth paying if it forces the White House to slash spending.
But “even a so-called ‘technical default’ would suggest a crisis of ‘governance’ from a sovereign credit and rating perspective,” Fitch said in a statement.
“Clearly the political signals which are coming (from Washington) are a source of concern,” David Riley, head of sovereign ratings at Fitch, said in an interview.
Fitch said the ratings would go back up once the government fulfills its debt obligations but probably not to the current AAA level, Fitch said.
President Barack Obama is trying to win congressional approval to raise the borrowing authority before an Aug. 2 deadline.
The Republicans’ theory is that bondholders would accept a brief delay in interest payments if it meant Washington finally addressed its long-term fiscal problems, putting the country in a stronger position to meet its debt obligations later on.
But even Fed officials are starting to get worried about the game of chicken. St. Louis Federal Reserve Bank President James Bullard said “the U.S. fiscal situation, if not handled correctly, could turn into a global macro shock.”
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