Newspaper article St Louis Post-Dispatch (MO)

Budget Fallout U.S. Default Could Be Costly in Subtle Ways

Newspaper article St Louis Post-Dispatch (MO)

Budget Fallout U.S. Default Could Be Costly in Subtle Ways

Article excerpt

Worries of a U.S. default prompted by the budget brawl in Washington have been felt mostly in the financial markets, where investors see a small but growing possibility of a tainted government credit record.

But a default could tap the wallets of average Americans in ways that aren't so obvious, raising borrowing costs on everything from mortgages to sewage systems.

Some questions and answers about what could happen:

Q. What is this debt ceiling business all about?

A. The government borrows money to supplement cash from taxes and other sources to pay bills. The limits of that borrowing are set by Congress. If the limits are reached, the ceiling on borrowing must be raised.

On Friday Congress proposed measures to let the government continue borrowing money through Dec. 12, but the bills include budget cuts and spending limits unacceptable to President Bill Clinton. Without an extension, government coffers will run dry.

Q. So what?

A. Many government services would be curtailed. But the Treasury's immediate problem would be how to pay $24.8 billion in interest due next Wednesday.

Without the money to pay, stock and bond prices here and abroad could drop as investors lose some confidence in the U.S. government.

Q. That doesn't sound good, but what impact would that have on me?

A. Consumers getting ready to sign papers for a new mortgage could see the cost of borrowing go up.

Mortgage rates are tied to Treasury yields. A default could lead investors to believe that government bonds are riskier than they thought, so they could demand a higher yield, perhaps one-quarter to three-eighths of a percentage point more than they get now. Analysts call this the "risk premium."

Undecided home buyers could "lock in a mortgage now ahead of that risk premium, or wait until Congress gets its act together and the whole thing blows over," said David A. Lereah, chief economist at the Mortgage Bankers Association, a Washington trade group.

Q. How would communities and businesses be affected?

A. Municipal bond rates also are tied to Treasury yields. Bankers say some towns could decide to scrap bond offerings scheduled for early next week, delaying public works projects for road building, schools, sewers. …

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