S&P: Yes, We Will Downgrade US Debt to D if They Can’t Pay

John Chambers, managing director of sovereign ratings at Standard & Poor’s (NYSE:MHP), spoke with Bloomberg Television about the debt ceiling (NYSE:TLT) and U.S. credit rating. Chambers said S&P would lower its sovereign top-level AAA ranking to D if the U.S. can’t pay its debt, but clarified that S&P thinks that the government “will raise the debt ceiling.”  He also said that if we get to a situation where the government can’t pay its debts, it will be “much more chaotic” than the September 2008 Lehman collapse.

Chambers on what S&P would do if there is a failure to raise the debt ceiling and a default by the U.S. government on its debt obligations:

“If any government isn’t pay its debt (NYSE:TBT) on time, the rating of that government goes to D.  Having said that, we think the government will raise the debt ceiling.  They’ve raised it 78 times more or less since 1960. Often at the very last moment.  We think that will be the case this time.”

“We are talking about the sovereign rating, the issuer credit rating of the United States government.  If you don’t pay on time, like any other sovereign credit, the rating goes to in this case SD for selected default.

On whether financial markets perceive a selective default different than just a government in default:

“Well I think if you get to the situation where the government hasn’t paid its debts, you are going to have very serious disruptions throughout the money markets, in the repo markets, in the foreign exchange market and the bond market.”

“[The situation would be] much more chaotic than September 2008, which also supports our view that this will not happen because policymakers will understand that.”

On whether S&P would have to downgrade all of the debt backed by the federal government:

“They wouldn’t go to D if they were still paying their debt. But depending on how long you thought the situation would endure, it could engender downgrades of some very highly government-supported enterprises and also some very highly rated entities in the U.S.”

On whether it would be legally possible for the U.S. to prioritize debt payments so that interest and principle on Treasuries remain current:

“I think that they can prioritize payments, however you would have to contract your payments in a massive way overnight and that would have very sharp negative fiscal impulse to the economy and that would be disruptive.”

On whether this will be the single most important credit decision S&P has ever faced:

“The government has raised the debt ceiling 78 times, many times at the 11th hour.  I think it’s gotten more attention this time because of the intractability of relations in Washington right now.  I think that later on in the month of July that the Democrats and Republicans will reach a compromise and the debt ceiling will be raised.”