US Government Debt Different - Finance Department - University of ...

Jeremy Kreisberg & Kelley O’Mara (Under the Supervision of Professor Howell Jackson)In addition to providing for a debt limit increase, the BCAestablished caps on discretionary spending 78 and created the JointSelect Committee (“Super Committee”), which had the stated goalof achieving at least $1.5 trillion in savings over 10 years. 79 Thoughthe threat of default was no longer looming, market reactions tothe resolution of the impasse were not positive. 80 The protractednegotiations showcased Washington’s fractious partisan politics andcreated a crisis of confidence. 81 The price on one-year U.S. CDSsmore than doubled during the summer of 2011, reflecting theincreased speculation that an agreement would not be reached anda “credit event” would take place. 82 On August 5, 2011, Standard& Poor’s downgraded the long-term sovereign debt credit ratingfor U.S. Treasuries from AAA to AA+, stating that “the politicalbrinksmanship of recent months highlights what we see as America’sgovernance and policymaking becoming less stable, less effective, andless predictable than what we previously believed.” 83 Additionally,the lengthy negotiations served to increase borrowing costs in FY2011 by $1.3 billion. 8426978Budget Control Act of 2011, Title 1. See Letter from Cong. Budget Office, to John Boehnerand Harry Reid regarding Budget Control Act Analysis (Aug. 1, 2011), which estimated thatthis part of the legislation would reduce budget deficits by $917 billion between 2012 and2021.79Budget Control Act of 2011, Title 4. Austin & Levit, supra note 2, at 3, states that failureto meet this goal triggers $1.2 trillion in automatic cuts, for a resulting total of at least $2.1trillion in cuts over the 2012-2021 period.80See e.g., Michael Krebs, Global Markets Crash as Congressional Job Disapproval Hits High,Digital Journal, Aug. 5, 2011, http://www.digitaljournal.com/article/309962.81See e.g., Timothy Geithner, Editorial, Compromise Achieved, Reform’s the Next Chapter,Wash. Post, Aug. 2, 2011, http://www.washingtonpost.com/opinions/compromise-achievedreforms-the-next-chapter/2011/08/02/gIQAXQBMqI_story.html(“It should not be possiblefor a small minority to threaten catastrophe if the rest of the government decides not to embracean extreme agenda of austerity and the dismantling of programs for the elderly and theless fortunate.”).82The Economist, The Mother of All Tail Risks, June 23, 2011, http://www.economist.com/node/18866851 (“One-year protection is now almost as expensive as five-year protection. Thisis more often seen in distressed markets where investors are pricing in an imminent defaultthan with otherwise healthy borrowers with long-term problems.”).83Standard & Poor’s, Press Release, United States of America Long-Term Rating Lowered To‘AA+’ Due To Political Risks, Rising Debt Burden; Outlook Negative (Aug. 5, 2011) (availableat http://www.standardandpoors.com/ratings/articles/en/us/?assetID=1245316529563) (“Welowered our long-term rating on the U.S. because we believe that the prolonged controversyover raising the statutory debt ceiling and the related fiscal policy debate indicate that furthernear-term progress containing the growth in public spending, especially on entitlements, or onreaching an agreement on raising revenues is less likely than we previously assumed and willremain a contentious and fitful process.”).84Gov’t Accountability Office (GAO), Debt Limit: Analysis of 2011-2012 Actions Taken and