Taking the long view of the debt limitREUTERS
To get a sense of how absurd a sudden default of U.S. debt would be, turn back the clock two-and-a-half years.
On January 14, 2009, six days before the inauguration of President Barack Obama, Greece took its first step toward the precipice of default. On that day, citing worries that Athens was fudging its books, the credit rating agency S&P cut Greece's debt grade to A-. Furthermore, the agency warned that trouble lurked for Spain, Portugal and Italy, if those countries didn't clean up their acts.
S&P was right to worry. Some 30 months later, Athens' debt is junk and the interest rate on Greek bonds has stunningly tripled, from 5.3% in early 2009 to 17% today, indicating widespread doubts that the county will ever pay back its promises. The United States, meanwhile, is sitting comfortably with 3% interest on our 10-year bonds, meager decimals higher than the cold afternoon President Obama was inaugurated.
Predictably, Greece is on the edge of default. Unpredictably, so are we.
Our circumstances couldn't be more different. Consider the sovereign credit default swap spread, which is probably the best indicator of how risky investors perceive a country's debt. Greece has the world's worst CDS spread, at nearly 2,000. The United States has the world's seventh lowest sovereign CDS spread, near 50. Thanks to the Federal Reserve's appetite for debt and foreign investors' so-called "flight to safety," it is easier for the United States to borrow today than it was in 2006 or 2007. For Greece, it's four times harder.
And yet we might actually default first. How? It all comes down to gruesome politics and a 94-year old law.
Let's all blame Gavrilo Princip.
Without Archduke Ferdinand's assassin, there might have been no World War I. Without World War I, the United States wouldn't have needed to pass the Second Bond Liberty Act in 1917 to issue long-term debt. Without the Second Bond Liberty Act, Congress might never had enshrined the debt ceiling, which politicians have now turned into missile aimed squarely at the heart of the country's financial credibility.