Prolonged deficit deal bickering will make deficit cutting even harder
We can finally put a price tag on Washington's partisan politics. If it fails to compromise on a plan to raise the debt ceiling and cut the deficit to satisfy the rating agencies, it could cost taxpayers $100 billion. This is an estimate of how much the nation's borrowing costs will rise if its debt is downgraded. Let's consider the significance of this sum.
Where the $100 Billion Estimate Comes From
First, where did this estimate come from? It was calculated by Terry Belton, JPMorgan Chase's global head of fixed income strategy. He revealed the projection on a conference call organized by Securities Industry and Financial Markets Association on Tuesday. So this isn't political activist talking: it's Wall Street's assessment.
Belton's figure isn't the total cost of downgrade. It doesn't include the money lost by investors as Treasury prices decline. It doesn't take into account any of the other potential economic fallout either. The $100 billion is just the additional interest that taxpayers must cover in the future due to a U.S. downgrade, since Belton estimates that Treasury yields will consequently rise 60 to 70 basis points. The damage to U.S. creditworthiness would be permanent, even after the U.S. gets its AAA rating back.