New Castle News


October 16, 2013

Our Opinion: Brinksmanship over default carries high risks

NEW CASTLE — Whenever the United States government borrows money, it does so at very low interest rates.

And the reason is simple: In the marketplace, interest rates are heavily influenced by the ability of the borrower to repay.

If it’s absolutely certain the money will be paid back, there is no risk to the lender. In these circumstances, that lender is willing to accept a low rate of return in exchange for assurances the loan will be covered in full.

In short, that’s how lending rates of all sorts are determined in the marketplace. The greater the uncertainty of a payback, the higher the interest rate charged.

As of this writing, there is no final determination as to whether Congress will raise the federal debt ceiling to avoid Thursday’s deadline. But conventional wisdom says that lawmakers will reach an agreement and raise the debt limit in time to avoid a potential default.

If you look at the stock and bond markets, investors seem to be operating on the belief a deal will be reached to extend the debt limit. That’s because gyrations in the market have been relatively modest. A real fear of default would lead to a market plummet.

And indeed, congressional leaders have made it clear they don’t view default as an option, even as they wrangle with each other to address matters related to the debt ceiling and the ongoing partial shutdown of the federal government.

The danger, however, is some sort of miscalculation that causes last-minute negotiations to collapse. By all accounts, the animosity among key players in Washington is palpable. The wrong move or the wrong statement may make a mess of things and derail any deadline deal on the debt ceiling.

Meanwhile, there seems to be a powerful minority of Republican lawmakers that doesn’t have a problem with the possibility of a default. They have been presenting it as no big deal and scoffing at the notion of economic chaos — despite dire warnings from economic experts and the business community. It’s as if they have embraced the view that they need to wreck the economy in order to save it.

No one really knows what would happen if the debt ceiling deadline is missed. Perhaps the markets would muddle through, anticipating an eventual agreement that would paper over problems. But if the United States government fails to pay its debts — and one way or another, that would happen in a default situation — the shock waves running through the global economic system could be dire.

And we are concerned that the damage already may have been done. If the inability of Washington to work effectively creates doubt among investors, the cost of borrowing by the government will rise. That is not in the nation’s interest.

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