Poll analysis:

01/17/2013

More than 60% of the 1,265 respondents to this week's poll expect that if the U.S. government fails to resolve its debt-ceiling crisis and defaults on its debt, any negative market impact would be short-lived. Approximately 22% of respondents think the consequences of default would be more long lasting, with long-term borrowing rates rising and the U.S. losing its reserve currency status. Only 18% of respondents view the debt-ceiling crisis as a largely political dispute that is likely to be ignored by markets. The U.S. government will hit the statutory limit on its ability to borrow sometime between mid-February and early March. At that point, unless Congress authorizes an increase in the debt ceiling, the government will not be able to meet all of its financial obligations. There is currently a standoff in Washington, D.C., with the Republicans tying any increase in the debt limit to future spending cuts, a precondition opposed by President Barack Obama and the Democrats. There is also disagreement over what exactly constitutes a default. Without a debt-limit increase, the government would be able to pay about 60% of its bills. The Republicans have suggested that by prioritizing payments, the government can pay the interest on its debt and thus avoid technical default, an approach that has been dismissed by Obama and the Democrats as legally tenuous and logistically impossible. Although the political squabbling has garnered most of the headlines, there are real financial consequences at stake. Fitch Ratings has indicated that the proposed prioritization plan would "very likely" result in a downgrade of the country's credit rating. Fitch also warned that any deal should include meaningful steps toward deficit reduction. Certain to follow any downgrade would be increased borrowing costs, which would have a negative effect on the economy. If this crisis sounds familiar, it is because the U.S. went through it before. The debt-ceiling wrangling in July 2011 led to a downgrade of U.S. debt and a 15% sell-off for U.S. stocks. Although stocks did recover in 2011 and the country's reserve currency status was never in jeopardy, without meaningful long-term fiscal reforms, markets in the future may not be so forgiving. -- David T. Larrabee, CFA, Director, Member and Corporate Products, CFA Institute

Published in Brief: