Investors Held Hostage in Debt-Ceiling Standoff

Patch is pleased to partner with Brian R. Hook, editor and investigative reporter for Missouri Watchdog, a news website dedicated to investigative journalism about local, state and federal government across Missouri. We've invited Hook to contribute a weekly column that describes what he's watching and why it's important for Missouri taxpayers.

I’m tired of watching the summer blockbuster playing in Washington, D.C. I fear it is not going to end well.

Politicians are playing a dangerous game of political chicken. Actually, a better comparison might be Russian roulette. But instead of a single round, in this game, every chamber in the revolver has a bullet.

Deal or no deal, default or no default, the U.S. is likely to face a downgrade of its AAA credit rating.

Standard & Poor’s, one of the world’s major credit rating agencies, warns there is a 50 percent chance that the U.S. will be downgraded within the next 90 days, referencing “significant uncertainty” in our creditworthiness.

To me, this seems clear. And I can’t stress this enough. Credit ratings matter.

A lower credit rating means higher risks for investors, which likely leads to higher interest rates.

To quote Vice President Joe Biden, “This is a big (expletive) deal.”

Everything in the financial world, and I mean everything, is linked to the credit rating of the U.S.

Moody’s Investors Service, another major rating agency, placed ratings for 162 local governments in 31 states on review Thursday. Earlier this month, Moody’s placed five states under review for possible downgrade.

Some 400 other AAA-rated public finance credits have not been placed on review for possible downgrade by Moody’s. But if the U.S. long-term debt is downgraded by more than one notch, Moody’s said, it will reassess.

Missouri, which has $4.5 billion in debt outstanding, is one of only a handful of states with a AAA rating from the three major credit rating agencies. The Missouri Office of Administration, which oversees the state’s bonding activities, is monitoring developments in Washington, D.C., a spokesperson told Missouri Watchdog.

The Missouri State Employees’ Retirement System, which adminsters retirement benefits for most state employees, also is watching developments, a spokesperson said. It has nearly $7.7 billion in assets.

Many pensions are required to invest a certain percentage of their assets in AAA-rated investments.

Gary Pollack, a managing director in New York with DB Advisors, with more than $250 billion in fixed income assets worldwide, said pension fund managers might want to reconsider their investment policies.

In other words, as investors in our local, state and national economy, we all may need to lower our standards.

I hope my fears are proven untrue. If not, we all lose. And in the end, it’s going to hurt.

For news updates, sign up for a newsletter and follow Missouri Watchdog on Twitter and Facebook. Brian R. Hook may be reached by phone at 314-482-7944 or by email at brhook@missouriwatchdog.org.