The Debt Ceiling: Time For a Banker to Weigh In

There's been plenty of sqwaking in the media and political posturing on Capitol Hill these past few weeks, especially as it relates to the Nation's debt ceiling, and either raising it or risk default.  I figure that, as a lender who deals with credit and risk management on a daily basis, it's time for me to weigh in.

I had a client sent me a panicked email today, asking if it would be okay if they sent in their Q2 financial reporting on Wednesday the 3rd instead of Monday the 1st.  The client felt horrible about being late, but had been bogged down by an increase in business this year, and needed a couple extra days to finish reconciling the books.  Why am I telling you this?  Because this is an example of not a good, but a GREAT client that is managing its reputation around the full faith and credit of itself as a business-- with flying colors.  We're not talking about payment delay or default, or even any substantial risk change in the business, and they are reacting with great sensitivity.  Side note: Of COURSE I granted them the extension to report their financials!

Take the opposite end of the spectrum.  For a large institution like the US, reporting statistics has become almost an automated process, and gaining the info within these reports is not such a chore, as can be with middle-market banking.  BUT...this institution has been running red ink (a budget deficit) for far longer than any credible business would be able to sustain prior to a credit downgrade.

This is why I can say with almost complete certainty that at some point next week, we'll be discussing the downgrade of US debt from AAA by both Moody's and S&P.  Risking delayed payments to any debtors has negative implications, and increasingly leveraging the country with budget deficits only protracts those risks.

Spending is out of control, and the waste inherrent in that spending has increased over time as more people have become keen on how to play the game.  I'm all for important social progams, but you have to instill a slapping mechanism for when the beneficiaries of these programs bite the hand that feeds them.

Washington is playing politics with our country's credit rating hanging in the balance, and this is sure to have a negative affect on the interest rate environment.  While I'm sure there will be a deal to increase the debt ceiling next week, it appears that there is still plenty of posturing on the right to make the deal a 6-9 month fix, and posturing from the left to close tax loopholes.  And why can't they compromise?  Because this is a game to politicians, and the Republicans 'win' if the debt problem comes back before the next election, and Democrats 'win' if they can close tax loopholes so that they don't have to cut spending as drastically.  It's disgusting, and all of us ordinary Americans are going to pay a price for their game of chicken, but most likely not to the extent that the media is hyping it up.  Remember the lessons from Carmageddon on this one!