S&P put out another report on US sovereign debt and the likelihood of a default if an increase in the debt cap isn’t passed.
S&P lays out three scenarios for whether and how the debt ceiling will be raised by August 2 deadline and the outcomes of each.
The most perilous:
Scenario 3–The White House and Congress cannot agree to raise the debt ceiling by their Aug. 2 deadline, and the Treasury begins to sharply reduce spending to preserve cash for debt service and to try to keep within the debt ceiling. Such measures could conclude, if the standoff persisted for just a short while, with the Treasury missing an interest payment or failing to pay off maturing debt, i.e. a default.
A fair assessment? Perhaps not. No one can say for sure how long the US can pay its debt service if it cuts back on other obligations.The two paths that would lead to better results?
Scenario 1–The White House and Congress agree to raise the debt ceiling and collaborate on a long-term framework for fiscal consolidation;
Scenario 2–The White House and Congress agree to raise the debt ceiling to avoid potential default but are not able to formulate what we consider to be a realistic and credible fiscal consolidation plan;
In reality, S&P is only guessing.
Douglas A. McIntyre
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