Top credit rater expects Congress to raise debt limit

{mosads}Further buoying his confidence is the fact the many lawmakers still remember the last time a legislative move shook the financial markets. When the House initially voted down the Troubled Asset Relief Program at the end of September 2008, the Dow Jones Industrial Average dropped 777 points in a single day’s trading. Many members of Congress haven’t forgotten that, Chamber said.

Failure to raise the debt limit would be “much more chaotic than September 2008, which also supports our view that this will not happen because policymakers will understand that.” However, if Congress defies expectations and fails to boost the debt limit before defaulting, the ramifications could be far-reaching, he said.

While S&P would not move to similarly downgrade all debt backed by the federal government immediately after a default, several additional downgrades would occur if lawmakers did not promptly raise the debt limit.

“It could engender downgrades of some very highly government-supported enterprises and also some very highly rated entities in the U.S.,” he said.

Chambers’s comments came one day after fellow credit rater Moody’s
Investors Service similarly warned that a default would result in a
downgrade of not just the government’s credit rating, but also other
ratings tied to the government, like those held by bonds issued by
housing giants Fannie Mae and Freddie Mac, as well as those issued by
banks guaranteed by the government.

Chambers gave some credence to a Republican argument that the government can avoid default after reaching the limit by prioritizing payments, but noted it would come with a heavy economic cost.

“You would have to contract your payments in a massive way overnight and that would have very sharp negative fiscal impulse to the economy,” he said.