Wilted Reputations Left By Shutdown And Default Threat There was a sense of relief Thursday as the U.S. government went back to work and once again skipped past default. But around the world, many investors wonder whether the U.S. is going to be in fiscal crisis mode for some time to come, and how the country's currency and creditworthiness will be viewed by others.

Wilted Reputations Left By Shutdown And Default Threat

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As the president said, the shutdown and the threat of default did unnecessary damage to both the U.S. economy and the nation's reputation abroad. NPR's John Ydstie takes the toll.

JOHN YDSTIE, BYLINE: Standard & Poor's is just one of the firms assessing the damage to the U.S. economy from the government shutdown. It concluded that the disruptions subtracted about $24 billion from the economy and is likely to trim more than a half a percentage point off growth in the final three months of the year. Of course, some of the businesses that lost money during the shutdown will gain it back as federal workers and the federal government make up for spending that was deferred.

But there are likely to be longer term repercussions, according to Beth Ann Bovino, S&P's chief U.S. economist. She says the fact that the agreement only keeps the government funded until mid-January is a worry, which leaves hundreds of thousands of federal workers with lots of uncertainty.

BETH ANN BOVINO: Will you get your paycheck or will be go back on furlough without pay again? Concerns of a repeat, I'm sure, on people's minds, and that's coming into the holiday season.

YDSTIE: Bovino says that could make the most important shopping season of the year pretty ho-hum. And it's not just federal workers who will hold back because of that uncertainty. Other workers will too. As well as businesses who might decide to put off hiring and investment. Some of the long term effects are global, says Adam Posen who heads the Peterson Institute for International Economics.

He says the U.S. suffered reputational damage as once again the world watched its chaotic political process produce self-inflicted damage to the economy. Posen says that damages U.S. leverage in negotiations with other countries.

ADAM POSEN: If you try to make a deal and it has to go to Congress, the people on the other side will say, why the hell should we adhere to this deal since Congress is clearly a random mad dog?

YDSTIE: And he says U.S. advice in international forums in crises will be discounted.

POSEN: They're going to turn around and say, who the hell are you to lecture me, U.S., since you can't even keep your own budget in order?

YDSTIE: Posen also says the credibility of U.S. securities has been eroded in the financial markets as investors decided they're no longer risk-free. That gives the U.S. a lower credit score and just like a lower credit score means higher interest rates for a household, it will mean higher interest rates for the U.S. government.

That's been obvious in the financial markets in the past couple of weeks, says Jens Nordvig, head of currency strategy at Nomera Securities. He says the interest rate on the very short term U.S. Treasuries went from near zero to almost half a percent, a huge spike as investors feared they're no longer risk-free.

JENS NORDVIG: That was a very dramatic situation and the more we have of those examples, the more the risk premium is going to be permanent, the more you'll see a situation where the U.S. government will have to pay higher interest rates than would otherwise be the case.

YDSTIE: And for every 10th of a percentage point increase in interest rates, U.S. borrowing costs rise $2 billion a year. Adam Posen says that as U.S. securities are viewed as less safe, it will erode their elevated status and the position of the U.S. dollar as well.

POSEN: This will only accelerate the rate at which the Chinese renminbi becomes accepted at least throughout Asia as an alternative to the dollar or Chinese government bonds become accepted as an alternative to the Treasury.

YDSTIE: And that could raise the cost of doing business for U.S. firms. Finally, Posen says, chaos is scaring off investment in the U.S.

POSEN: Investors who we need to get the economy out of the sort of slow growth, high unemployment state we're in will feel much more uncertain and will be less likely to make investments. And foreigners will be less likely to make investments in the U.S. because you just don't know what the environment's going to be.

YDSTIE: Posen says if Congress repeats its recent performance in January, when government funding runs out again, it will continue to erode confidence in the U.S. John Ydstie, NPR News, Washington.

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