John Ransom

The credit agency S&P intervened in the showdown between the GOP and the GOP today to remind participants that the issue is debt, not the debt ceiling.

Standard & Poor’s President Deven Sharma appeared before a House subcommittee overseeing credit agency ratings and had this to say:

"The more important issue is really the long-term growth rate of the debt … as well as the deficit," Sharma told a House Financial Services subcommittee according to the LA Times.

The head of the rating agency said they S&P thought that the U.S would not default on its debts. But he also reminded everyone that even if the country gets clear of the debt ceiling issue, a credit downgrade, which could cost the country hundreds of billions of dollars annually in interest payments, is all but assured without at least a $400 billion per year cut almost immediately.

Even then Sharma emphasized that he could not guarantee that any proposal would save the country from a downgrade until S&P was able to review after it had passed into law.     

On June 24th I wrote that the U.S. would have to cut $500 billion in spending immediately just to avoid swamping the sovereign debt market and risking a global sovereign debt crisis. The world is bumping up against a limited amount of debt that it can carry without radically debasing currencies, which would cause rapid, high inflation world wide.   

While S&P struggles with the size of the U.S. debt relative to the country’s GDP, of more concern is whether there is enough money to finance the world’s governments. The U.S. under the Federal Reserve Bank has been the largest buyer of Treasuries in recent months, just completing a $600 billion bond purchase known as quantitative easing.

One Wall Street source has told me that he believes that in the event of a debt ceiling deal not being agreed to by the president and Congress that the Federal Reserve will stand in as the buyer of record on maturing Treasuries, therefore taking care of principal payments. The Treasury Department would then presumably only have to pay interest on the debt.

John Ransom

John Ransom’s writings on politics and finance have appeared in the Los Angeles Business Journal, the Colorado Statesman, Pajamas Media and Registered Rep Magazine amongst others. Until 9/11, Ransom worked primarily in finance as an investment executive for NYSE member firm Raymond James and Associates, JW Charles and as a new business development executive at Mutual Service Corporation. He lives in San Diego. You can follow him on twitter @bamransom.