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Moody’s Points to the Real Debt Judgment Day

From National Review:

May 21, 2011, was supposed to be Judgment Day according to Harold Camping. It was, in a sense. As the day came and went, the world judged that Camping’s 15 minutes of fame were up. Treasury Secretary Tim Geithner may yet learn something from Camping.

Geithner has been a whirlwind of worry about the nation defaulting in the event Congress fails to raise the debt ceiling. It is interesting, therefore, that the market for U.S. debt—where the default would occur—remains sanguine about the debt ceiling debate and dismissive of Geithner’s flailings. Notice how the bellwether 10-year Treasury bond rate has recently plunged to or below 3 percent—hardly a harbinger of trouble.

The markets know, as does Geithner (his protests notwithstanding), that there is no way the Treasury will default on the federal debt. No matter what happens with the debt ceiling, interest will be paid out of ample tax revenues. Geithner knows it. The markets know it. So they are unconcerned.

Debt markets also know the United States cannot keep on racking up trillion-dollar budget deficits. The long-run fiscal picture has long been disastrous, but President Obama’s policies have now nailed that long-run picture to a near-term frame, and it hangs outside the Treasury Secretary’s door, greeting him and his bond sellers every morning.

And it’s not as though the credit markets are unusually insensitive to such matters. On the contrary, with Europe imploding under the debt pressures from Greece, Portugal, Ireland, Italy, and maybe even Spain, the question of sovereign debt is first and foremost.

The markets are watching not whether the debt ceiling increases but whether Congress and the President let the moment pass without taking strong action to reduce spending now and in the future. This point was hammered home in a statement by Moody’s, a credit-rating agency, on the outlook for the rating of U.S. debt: A credible agreement on substantial debt reduction would support a continued stable outlook; lack of such an agreement could prompt Moody’s to change its outlook to negative on the AAA rating.

It can’t get much plainer than that. Make real progress or there will be a price to pay.

Read the rest at National Review.


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