Last Updated Jul 21, 2011 10:06 AM EDT
The government has two big payments due in the first part of August:
- It owes about $32 billion in Social Security and other payments on August 3.
- It owes about $31.5 billion in debt service and redemption on August 15.
One of the most important implications of a failure to reach agreement on extending the debt ceiling and/or failing to put in place credible deficit reduction programs is that the ratings agencies would likely downgrade Treasury debt. They've already warned about this prospect. If that happened, Treasury bills would no longer be the benchmark "riskless" asset. In addition, there are several other bonds that would likely suffer reviews and downgrades:
- Government-sponsored entity or such related debt
- Prerefunded bonds backed by Treasuries
- Bonds relying heavily on capital market access, such as variable-rate demand notes and commercial paper
There are some other implications to consider. The most important one is that there would likely be a disruption in the liquidity of the markets (both stock and bond). While it would likely be brief, it would also likely create great volatility, and markets could easily "seize up," with liquidity disappearing. As I stated in my post on July 18, forewarned is forearmed.
While we've always preached the merits of maintaining very strict credit standards, maintaining those standards (and not stretching for yield, which can be tempting in a low-rate environment) is more important than ever. In addition, it's also more important than ever to be sure to have sufficient liquidity in highly liquid assets (such as bank accounts).
Photo courtesy of Public Notice Media on Flickr.
More on MoneyWatch:
Debt Ceiling: Why You Shouldn't Rush to Change Your Portfolio What the Greek Crisis Means for Your Portfolio Meredith Whitney: Could She Have Been More Wrong? The Bigger Active Funds Get, the Worse Their Alpha How Are 2011's Sure Things Faring at Mid-Year?
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