ROBERT SIEGEL, Host:
From NPR News, this is ALL THINGS CONSIDERED. I'm Robert Siegel.
MICHELE NORRIS, Host:
And I'm Michele Norris. The debt ceiling deadline is now just a week away, and party leaders in Washington spent the day counting votes. Each side has its own plan, but it's not clear that either has the votes necessary for approval. Last night, President Obama laid out some of the stakes of this impasse.
P: For the first time in history, our country's triple-A credit rating would be downgraded, leaving investors around the world to wonder whether the United States is still a good bet. Interest rates would skyrocket on credit cards, on mortgages and on car loans.
NORRIS: But as NPR's Yuki Noguchi reports, it's not clear that all of that would happen, and some say the real effects are hard to predict.
YUKI NOGUCHI: First, let's make a distinction. If the U.S. defaults on its debt, it will mean big problems. Whether it will be catastrophic, as the administration says, depends on how markets react. And there's little doubt it would be very costly. But what if there's no default, and it's just a downgrade? The government's borrowing costs would almost certainly go up, but some experts say a downgrade is primarily a public relations issue.
JOSEPH GAGNON: Not meaningless, because it's sort of a nice focus for the press, but it just isn't a big financial deal.
NOGUCHI: That's the opinion of Joseph Gagnon. Gagnon is an economist at the Peterson Institute, and he says what matters far more is how we arrive at that downgrade. Let's say the stalemate continues, and the government runs out of cash to pay its workers, contractors and Social Security benefits. Well, that might not be a default, Gagnon say. It might push the economy into another recession - a big deal. Gagnon says there's another scenario, less scary and more likely.
Ratings agencies may downgrade the U.S.'s credit even if Congress does raise the debt ceiling, if it doesn't address long-term deficits at the same time. The economic impact of that kind of downgrade, Gagnon says, could easily be a non-event.
GAGNON: You know, oftentimes, the rating agencies are behind the curve. And this is certainly the case now, where the rating agencies don't have any additional information that everyone else in the market has already.
NOGUCHI: Japan's sovereign debt rating was cut in 2002 and...
GAGNON: There just wasn't a big effect.
NOGUCHI: It turns out, this opinion is shared by Standard Poor's itself. In a series of reports published last week, the ratings agency assessed the likely impact of a downgrade not accompanied by default. It said, in short, not much. In fact, some say, given the financial situation in the U.S., it probably should have happened a long time ago.
KENT SMETTERS: I would have downgraded them 10 years ago.
NOGUCHI: Kent Smetters is a former Treasury official, and now a professor at the Wharton School. Smetters says for many years, he's believed that interest payments, Social Security and Medicare were going to rise unsustainably - as they have. He says what's being revealed with the threat of a downgrade is that politicians on both sides have lost the ability to compromise.
SMETTERS: It's a statement that basically says to the world, it's not even obvious that we're serious about dealing with the longer-term problems.
NOGUCHI: Smetters says politicians like to suggest the country's credit rating has close ties to consumer credit, but he's skeptical.
SMETTERS: I think that is a way of trying to get the voter base into action, but it's not going to have as dramatic of an impact on mortgages and credit card rates.
NOGUCHI: That's not to say a rating cut won't look bad. Here, again, is the Peterson Institute's Joseph Gagnon.
GAGNON: I would not be at all surprised if someone at Treasury was talking to the rating agencies and saying, well, what do you need - what do we need to avoid a downgrade? Minimum of what? How much deficit reduction? I would be very surprised if they weren't talking to them and trying to get that.
NOGUCHI: Because if you can avoid both economic and public relations fallout, why wouldn't you? Yuki Noguchi, NPR News, Washington.