(Reuters) - The United States would immediately have its top-notch credit rating slashed to "selective default" if it misses a debt payment on August 4, Standard & Poor's managing director John Chambers told Reuters.
Chambers, who is also the chairman of S&P's sovereign ratings committee, told Reuters on Tuesday that U.S. Treasury bills maturing on August 4 would be rated 'D' if the government fails to honor them. Unaffected Treasuries would be downgraded as well, but not as sharply, he said.
"If the U.S. government misses a payment, it goes to D," Chambers said. "That would happen right after August 4, when the bills mature, because they don't have a grace period."
Fears of a technical default have been rising after budget negotiations between Democrats and Republicans fell apart in Washington earlier this week. Even a brief default by the United States would immediately increase the country's borrowing costs, weighing on the fragile economic recovery and eroding the dollar's status as a reserve currency.
On August 4, the Treasury Department is due to pay off $30 billion in maturing short-term debt.
With the debt talks stalled, new ideas are surfacing such as prioritizing debt payments. But Treasury Secretary Timothy Geithner warned lawmakers on Wednesday that such a move would still cause investors to shun U.S. Treasury securities.
Geithner said that because the United States now borrows roughly 40 cents of every dollar it spends, prioritizing payments with no debt limit increase would require cutting 40 percent of all government expenditures
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JUSTIN FOX, EDITORIAL DIRECTOR, HARVARD BUSINESS REVIEW: Unless Congress gets its act together to raise the debt ceiling, the U.S. will no longer be able to pay all its bills. Choosing whom to stiff will be interesting. Do we cut off military salaries? Food stamps? Social Security?
JUSTIN FOX, EDITORIAL DIRECTOR, HARVARD BUSINESS REVIEW: Unless Congress gets its act together to raise the debt ceiling, the U.S. will no longer be able to pay all its bills. Choosing whom to stiff will be interesting. Do we cut off military salaries? Food stamps? Social Security?
The people least likely to get stiffed are probably investors in U.S. bonds and bills. That`s because of what could happen if the nation defaults on its debts. Think of it as missing a credit card payment, with really big penalties.
The U.S. now has what amounts to the best credit card deal in the world. We get to borrow staggering sums of money and pay staggeringly little interest. If we default, that privilege will be gone forever. The Treasury will have to pay much higher interest rates. So will you.
OBAMA: If capital markets suddenly decide, you know what, the U.S. government doesn`t pay its bills, so we`re going to start pulling our money out,; and the U.S. Treasury has to start to raise interest rates in order to attract more money to pay off our bills, that means higher interest rates for businesses, that means higher interest rates for consumers. So all of the headwinds that we`re already experiencing in terms of the recovery will get worse.
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