While officials from the Obama Administration raised their rhetoric over the weekend about the possibility of a debt default if the debt ceiling isn’t raised, they privately have been telling top executives at major U.S. banks that such an event won’t happen, FOX Business has learned.
In a series of phone calls, administration officials have told bankers that the administration will not allow a default to happen even if the debt cap isn’t raised by the August 2 date Treasury Secretary Tim Geithner says the government will run out of money to pay all its bills, including obligations to bond holders. Geithner made the rounds on the Sunday talk shows saying a default is imminent if the debt ceiling isn’t raised, and President Obama issued a similar warning during a Friday press conference after budget negotiations with House Republicans broke down.
While the negotiations to craft a budget remain at an impasse, Republicans and Democrats on Monday began crafting their own plans to cut spending that could lead to an agreement to raise the debt ceiling. It’s unclear if a broad agreement can be reached any time soon, but even if a deal is struck, a complicating issue for lawmakers and the administration is the possibility of a downgrade to the US debt rating, which would cut the triple-A rating on the nation’s debt to a lower level.
Major ratings firms — namely Standard & Poor’s and Moody’s — have said even if the country raises the debt ceiling and doesn’t default, there’s a strong likelihood that the triple-A bond rating will be cut to double-A unless a budget can be crafted that results in $4 trillion in savings, the result of the massive debt load the country has accumulated in recent years. The nation’s outstanding debt is more than $14 trillion.
A senior banking official told FOX Business that administration officials have provided guidance to them that even though a default is off the table, a downgrade “is a real possibility for no other reason than S&P and Moody’s have to cover (themselves) since they’ve been speaking out on the debt cap so much.”
This guidance is a big reason why Wall Street has largely dismissed the possibility of default, and though the markets have been jittery amid the talk of default, they haven’t imploded as would be the case, many economists fear, if the nation missed a payment on its debt.
The banking official said the administration understands that if there were to be a default, it would likely spark another financial crisis.
“They also know they can pay the debt with cash on hand,” this official told FOX Business. The Treasury collects around $2 trillion in tax revenues, and is scheduled to pay out $200 billion in interest to bond holders. In order to meet its obligations to contractors, social security recipients and others, the administration would have to raise another $1 trillion either through cuts, higher tax revenues, the issuance of debt or a combination of all three.
Congressional Republicans believe that the Administration is raising the possibility of a default as a way to ramp up pressure on Republicans to agree to a budget deal that includes tax increases, which they oppose.
A Treasury spokesman said that “when we exhaust our borrowing authority, as we will on August 2nd, there is no way to guarantee that we will be able to pay all of our bills. Any suggestion to the contrary is simply false.”
Even without a default, banks expect some market turbulence if the triple-A sovereign-debt rating is cut, sources tell FOX Business. While bank officials do not believe there will be a “catastrophic” effect to a downgrade, that’s not to say there won’t be negative ripple effects, notably to bond deals and derivatives priced off triple-A-rated Treasurys.