Analysis: U.S. downgrade minor threat next to default prospect
By Pedro Nicolaci da CostaPosted 2011/07/26 at 2:45 pm EDT
WASHINGTON, July 26, 2011 (Reuters) — How much damage the U.S. debt ceiling scuffle does to the United States' reputation in global financial markets boils down to two increasingly plausible but very distinct outcomes: downgrade or default.
The former, while painful, might allow financial markets to hobble through without major incident, though leave the country under a cloud of financial uncertainty that would threaten an already fragile economic recovery.
A mere ratings cut would reflect the judgment of private agencies and could be glossed over by investors given a lack of viable alternatives to the giant $9 trillion-plus market for U.S. government debt. That's the benign scenario.
An outright debt default would be much more unpredictable -- and potentially cataclysmic.
Such an historic event as failure to make payment on Treasury bonds, considered the ultimate safe-haven in banking, would cascade through financial markets and the world economy, dealing a long-term blow to the global standing of the United States.
"Default on the debt would just be a catastrophe, it would be Lehman times ten" said Joseph Gagnon, a former Federal Reserve economist now with the Peterson Institute for International Economics. "Financial markets would seize up. No one would know what is safe anymore."
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