S&P: Payment Prioritization Would Draw a Debt Downgrade
It’s hard to deduce a unified Tea Party theory of the debt limit, but as far as I can tell, the story goes that, when the debt limit is reached, the government can simply prioritize payment to debt service and pick and choose who else to pay out of existing government revenue. This will force the nation to “live within its means” and will have no material impact on our bond rating, since the bondholders will get paid.
But Standard and Poor’s just threw a wrench into that theory:
Standard & Poor’s has warned lawmakers privately that it would downgrade the country’s debt if the Treasury Department is forced to prioritize payments because Congress does not raise the debt limit, a congressional aide said on Thursday.
Payment prioritization has shaky legal foundations anyway. But now, S&P is saying they will treat it as akin to a default event and downgrade the country’s debt. There’s a pretty obvious reason: if we’re paying Wall Street bondholders or sovereign wealth funds over Social Security beneficiaries, the public outcry will be so great that eventually, the prioritization would have to stop. And so debt service could fall to the back of the line. Anyway, statutorily speaking all creditors owed payments have equal footing. I’m not a big credit rating agency fan, but it seems S&P has this right.
Now, conservatives might argue that S&P has it wrong. But that really doesn’t matter. If they’re downgrading, they’re downgrading, and right now they’re telling you up front the conditions for a downgrade. Those are conditions we desperately want to avoid, because the resultant increase in borrowing costs would negate much of the savings that would come from any deficit reduction deal.
This whole idea that reaching the debt limit would be no big deal is deeply irresponsible.