Defaults, catastrophe and Virginia’s unique concerns with both

Buried inside this Bloomberg report on the credit rating agencies threat to downgrade the U.S. if it defaults on its debt was a nugget that ought to send shivers through Virginia’s political class:

Ratings directly linked to the U.S. government would move in step with any sovereign action, while some Aaa rankings of state and local governments may be vulnerable, Moody’s said in its report yesterday.

The Moody’s report is more specific as to what types of debt issues might be at risk. Of interest for Virginia are, among other things, GARVEE bonds, which the McDonnell administration and the General Assembly are using to pump additional monies into road construction. Virginia plans to issue$1.1 billion worth of these bonds. As those bonds are backed by anticipated federal highway funds, a default and debt downgrade could make such bonds more pricey.

But that’s only the beginning of the fun. According to Moody’s:

Aaa rated U.S. state and local governments that may be most susceptible to downgrade are ones that have greater relative economic volatility and have economies that would be more sensitive to reductions in federal spending, rely more heavily on capital market access for cash flow notes and variable rate debt, and whose budgets would be most affected to cuts in federal programs such as Medicaid.

On at least one of those counts — Virginia’s reliance on federal spending — a sovereign debt downgrade could spell trouble for the commonwealth. A Census Bureau report shows that Virginia ranks 2nd in the nation in per capita federal spending — narrowly trailing number one ranked Alaska.

Moodys and the other rating agencies want the debt ceiling to be raised. They view a sovereign default, even for a few days, as a catastrophic event that would materially harm more than just Uncle Sam’s credit score. This echos arguments from Fed chairman Ben Bernanke and Treasury Secretary Tim Geithner, which in some free market quarters is not so much an endorsement of the idea as it is a condemnation.

The Moodys/Geithner/Bernanke concerns are hardly universal. And recent history with other countries shows that defaults — big, small and “technical” — don’t necessarily mean we’ll all be living in caves. Iceland, which defaulted not that long ago, is now back in the debt market and doing quite well for itself.

No one will mistake the U.S. for Iceland…or Russia (which defaulted in 1998)…or Argentina (which defaulted in 2001). We are the biggest debtor, and our default would cause the greatest problems. But truth be told, the U.S. has defaulted before (the first time under the Washington administration in 1790 and again under FDR in 1933). Reports indicate that the sun still rose in spite of these financial setbacks.

But that was then, this is now and what, exactly, would happen if the federal government went into a full-on default is anyone’s guess. Hardly a comforting thought for Virginia’s money handlers.

(Cross-posted at Score Radio Network)

  • Steve Vaughan

    I can’t think of how any good could come from a U.S. default. Maybe it wouldn’t be catastrophic (but then of course maybe it would), but it can’t be good.

  • valentinus

    It wouldn’t be good that we would have more trouble borrowing and deficit spending??

  • Following the links, I noted that the default in 1933 was not actually a default, but only that the debt would be repaid in currency no longer tied to gold instead of currency backed by gold. I believe 1933 was the year the United States got off the gold standard.

  • Temporary

    1933 was when FDR wrote Executive Order 6102 which made it illegal for private citizens to own gold. The penalty for “hoarding” (owning) gold was 10000 dollars (over 150000 dollars inflation adjusted) and 10 years in federal prison. Citizens were required to surrender all gold to the federal reserve bank by May 1st 1933 and were paid 20.67 dollars per ounce. Once all of the gold had been confiscated the dollar was devalued to 35 dollars per ounce which is the price that gold was pegged at until 1971 when dollar devaluation due to the Vietnam war “forced” Richard Nixon to abandon the gold standard completely.

    The amount of gold per capita of world population has changed little since 1933, but the dollar price has “risen” from 20.67 dollars per ounce to today’s 1500.00 dollars per ounce. Said another way, a 2011 dollar is worth 1.3% of a 1933 dollar, or less than 2 cents on the dollar.

    Between 1968 and 2002 the government also spent its 165 million ounce strategic silver stockpile, it now has no silver left.

    Your government at work.

  • Jamie Jacoby

    “But that was then, this is now and what, exactly, would happen if the federal government went into a full-on default is anyone’s guess.”

    I’ll guess. Rahm’s Maxim would be applied: “Never let a good crisis go to waste.” Fed dot gov would implement plans to ramp up control of the economy. Pretenses would drop across the board. The buying power of USD would drop dramatically.

    Those who were paying attention would note the complete failure of the command and control economic model was the cause of the collapse, and would question whether greater command and control was a viable solution. They would draw comparisons to the now-dominant notions that more debt is a viable solution to a debt crisis, and note also how that position ultimately carried the day. Still others would lament the death of free-market capitalism and its replacement by the corporatist oligarchy.

    Presidential candidates who are life-long committed free-marketers would be nicknamed “Radical” by “conservative” bloggers.

    OTOH, IMO a U.S. default would be great news for Virginia. We have productive land, exportable energy and some manufacturing, and deepwater ports, so we can trade for hard currency in the foreign exchange markets. You know; capitalism. Virginia would survive, even thrive, after some adjustment period. Just like Iceland.

    And, no, I’m not kidding.

  • Not Blue Virginia

    Many people in “foreign” countries seem to think that the question is no longer if the US will default but when. Between 2016 and 2036 is the current range.

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