The US Debt Debaucle

I would love to interupt my vacation in Florida to do an entire series of articles on the US Debt situation, but the sun is shining and I am feeling "disinclined" as Capt. Barbossa would say. There are enough news articles floating around.

To summarize the issue, the US Congress has imposed an upper limit on the amount of debt that can be issued by the US treasury. The ceiling will be reached early in August. To reduce the amount of borrowing, the government must reduce the size of the deficit. This requires an increase in taxes, a decrease in spending, or both. The Tea Party wing of the Republicans has vowed not to raise any taxes. The Democrats don't want to cut spending on social programs. Hence the stalemate.

The 14th Ammendment to the US Constitution tends to imply that the US Government cannot default on its debts which brings into question whether or not the debt ceiling limit is constitutional or not. President Obama sounds like he believes the 14th supercedes the ceiling. The US Supreme Court will have to decide at some point.

Moody's has threatened to downgrade US debt if they default in August. That would cause an increase in US interest rates and a drop in treasury prices. Banks holding treasuries would have to write down their holdings which, once again, would cause them to fall below the capital adequacy requirements. Enter QE3.

One issue that I have not seen, and am not entirely sure about (since palm trees are more interesting) is what happens to corporate debt ratings in the event of a downgrade of US government debt. In the mid 1990's when Canada's debt rating was downgraded due to the debt-to-GDP ratio, the bond ratings of all major banks was also downgraded. I recall the reason being that no private corporation in a country can have a higher credit rating than the sovereign debt rating. I reiterate that I don't know if that is still true, but if it is, the backers of certain Republican lawmakers may see an increase in their borrowing costs and a coincidental drop in their bond and stock prices if the Congress can't overcome this impasse.