Just a few days ago, Senate Minority Leader McConnell blocked Democrats from using a simple majority to get this done. Republicans may want to use this as a campaign issue against Democrats this coming fall trying to claim that they are growing the national debt.
But, the real story is, the national debt has risen regardless of which party is in control. House and Senate leadership. A majority of credit rating agencies rate the U.
Small business loans will become costlier as private lenders are forced to increase their interest rates. Even Small Business Administration SBA -guaranteed loans, which are often lower cost and more accessible but still reflective of market conditions, will become more expensive.
Many small business owners use their personal credit cards to cover business expenses and manage debt. As with loan rates, small business credit card and personal credit card interest rates will also rise, squeezing the amount of capital small business owners have to work with and potentially driving them into more debt. Credit markets will tighten up and U. Small businesses, especially unbanked ones and those in underserved communities, would be at a severe disadvantage when they have the least financial cushion.
This would be a one-two punch for small business owners who would see their own retirement savings dissipate and then lose business from consumers who are now dealing with their lost nest egg. In turn, larger public companies could lose value, thus making it harder to incorporate small businesses into their vendor supply chain. The Treasury Department has been taking steps to meet its obligations, including payments to households such as Social Security.
If the U. Many developing countries issue bonds in an alternate currency in order to attract investors — often denominated U. The reason is that when a country that borrows foreign currency faces a budgetary shortfall, it does not have the option to print more money. Research suggests that the presence of checks and balances leads to fiscal policies that maximize social welfare — and honoring debt carried by domestic as well as foreign investors is a component of maximizing social welfare.
Conversely, governments that are composed of certain political groups with a disproportionate power level can lead to reckless spending and, eventually, default. With the ability to print their own money, countries like the United States, Great Britain, and Japan appear immune to a sovereign default, but this is not necessarily the case. Despite a stellar record overall, the United States has technically defaulted a few times throughout its history.
Even if the government can pay its debts, legislators may not be willing to do so, as periodic clashes over the debt limit remind us. Investors can thus experience a loss on government debt, even if the nation has not officially defaulted. When a country defaults on its debt, the impact on bondholders can be severe. In addition to punishing individual investors, defaulting impacts pension funds and other large investors with substantial holdings. One way that institutional investors can protect themselves against catastrophic losses is through a hedging strategy known as a credit default swap CDS.
With a CDS, the contract seller agrees to pay any remaining principal and interest on a debt should the nation go into default. In exchange, the buyer pays a period protection fee, which is similar to an insurance premium. The protected party agrees to transfer the original bond, which may have some residual value, to its counterpart should a negative credit event occur.
While originally intended as a form of protection or insurance, swaps have also become a common way to speculate on a country's credit risk.
Many of those trading CDS, in other words, do not have positions on the underlying bonds that they reference. For example, an investor who thinks the market has overestimated Greece's credit problems could sell a contract and collect premiums and be confident that there is no one to reimburse.
Because credit default swaps are relatively sophisticated instruments and trade over-the-counter OTC , getting up-to-date market prices is difficult for typical investors. This is one of the reasons only institutional investors use them, as they come with more extensive market knowledge and access to special computer programs that capture transaction data. Just as an individual who misses payments has a harder time finding affordable loans, countries that default — or risk default, for that matter — experience substantially higher borrowing costs.
In general, nations with a higher credit rating enjoy lower interest rates and thus cheaper borrowing costs. When a country does default, it can take years to recover. Argentina, which missed bond payments beginning in , is a perfect example. By , the interest rate on its bonds was still more than 12 percentage points higher than that of U. If a country has defaulted even once, it becomes harder to borrow in the future, and so low-income countries are particularly at risk.
Perhaps the biggest concern about a default, however, is the impact on the broader economy. In the United States, for instance, many mortgages and student loans are pegged to Treasury rates. If borrowers were to experience dramatically higher payments as the result of a debt default, the result would be substantially less disposable income to spend on goods and services.
Because of fear of contagion can spread to other economies, countries with close ties — particularly those that own much of the country's debt — will sometimes step in to avert an outright default. This happened in the mids when the United States helped to bail out Mexican bonds. Whereas some investors look at a financial crisis and see chaos and losses, others recognize a crisis as a potential opportunity. These investors believe that sovereign default represents a bottoming out point — or something close to it — for government bonds.
For the optimistic investor, the only logical direction for these bonds is up. But many sovereign defaults are precipitated by a banking crisis. Studies have shown that public debt grows around two-thirds in the years after a crisis, while a crisis in a rich country can rapidly change capital flows in peripheral countries.
International investors should keep these points in mind when analyzing potential investments around the world. Actively scan device characteristics for identification. Use precise geolocation data. Select personalised content. Create a personalised content profile.
Measure ad performance. Select basic ads. Create a personalised ads profile. Select personalised ads. Apply market research to generate audience insights. Measure content performance. Develop and improve products. List of Partners vendors. Portfolio Management International Investing. By Justin Kuepper Full Bio LinkedIn Twitter Justin Kuepper is a financial analyst, journalist, and private investor with over 15 years of experience in the domestic and international markets.
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