Even if the U.S. doesn’t default, there could still be consequences for all this brinkmanship.
Lawmakers left Washington on Thursday without striking a deal to raise the debt ceiling, but reports suggest that Congress is nearing a deal as the country edges up on the so-called X-date.
Estimates suggest that the X-date, which is when the government will no longer be able to meet its financial obligations, could arrive as soon as June 1, though the exact date remains unknown.
Deal or no deal, the delay has caught the attention of credit rating agencies, such as Moody’s Corporation and DBRS Morningstar, which shares the same owner as Inc.
The two agencies posted notices, on Wednesday and Thursday, respectively, outlining how a default will likely result in credit rating downgrades. In such an event, it’s expected that high borrowing costs would worsen while access to credit would further tighten.
“Prior to this, banks were already pulling back on lending and tightening underwriting standards,” DBRS wrote in its note. “Failure of a deal would amplify the pullback, making it harder for consumers and businesses to get credit, hurting the economy further.”
The few workarounds some in Congress have entertained, such as minting a trillion-dollar coin, would not pass muster in Moody’s eyes. The same goes for invoking the 14th Amendment; a provision within the 14th Amendment maintains that the validity of the country’s public debt should not be questioned. In other words, some believe that invoking the amendment would allow the U.S. Treasury Department to continue paying its bills.
While both options have slim chances, the agency made clear that trying to avoid a default through “non-conventional means … is unlikely to be consistent with a ‘AAA’ rating.”
Even if lawmakers strike a deal close to the X-date, inking an 11th-hour deal could still result in a downgrade. That was the case in 2011, when lawmakers narrowly avoided a default when they passed the Budget Control Act of 2011 close to their own X-date. While the measure cut federal spending, it was enacted on August 2, 2011, the same day that the U.S. was expected to surpass its own borrowing authority.
Even though the countdown is on, the White House has affirmed that “default is not an option.”
“At the end of the day, everyone understands that the only way to move forward here is with a bipartisan, reasonable agreement on the budget that can win support from both sides–from both Democrats and Republicans in the House and in the Senate,” White House press secretary Karine Jean-Pierre told reporters on Thursday.
