National parks would likely close their gates, home mortgage rates could increase and local governments might have to absorb higher costs if national lawmakers can’t compromise on the debt ceiling before the deadline Tuesday.
Even if a compromise is reached, there’s still a 50-50 chance the country’s debt rating will decrease from its perfect AAA rating, according to Standard & Poor’s credit rating agency, which is calling for $4 trillion in spending cuts.
Such a credit rating drop would cause interest rates to rise for everyone from individual consumers to the federal government.
“What you’re really talking about is an across-the-board cut in the standard of living in the United States,” said Scott Phillips, head of research at Chattanooga-based Lauren Templeton Investments. “It may not be a very drastic cut, but it would have an effect.”
However, Moody’s Investors Service said late Friday that the United States should be able to keep its triple-A credit rating as long as Washington works out a deal that lets it continue to pay bondholders.
The Republican-controlled House of Representatives voted 218-210, almost entirely along party lines, for emergency legislation Friday night to prevent a threatened government default. But U.S. Senate leaders immediately defeated the plan by House Speaker John Boehner in a 59-41 vote.
“We are almost out of time” for a compromise, warned President Barack Obama as U.S. financial markets trembled at the prospect of economic chaos next week. The Dow Jones industrial average has lost 581 points over the past six days.
The House legislation would provide a quick $900 billion increase in U.S. borrowing authority — essential to allow the government to continue paying all its bills — along with $917 billion in cuts from federal spending.
Rep. Scott DesJarlais, R-Tenn., voted against the Boehner bill.
“After careful consideration, I ultimately decided that I could not vote in favor of the Budget Control Act,” he said. “If we want to create jobs and boost our economy, we have to address our spending and debt now. That means both substantial and immediate cuts.”
Senate Majority Leader Harry Reid is proposing a measure to cut spending by $2.2 trillion over the next decade, but raise the debt ceiling by $2.7 trillion, enough to meet Obama’s terms that it tide the Treasury over until 2013.
Parks could close
If the two sides can’t compromise in Washington, D.C., in the next few days, Chattanoogans will likely feel the effects in a number of ways. In the worst-case scenario that lawmakers reach no compromise, federally-funded services could begin shutting down next week.
Jim Davis, spokesman for the Gatlinburg Department of Tourism and Convention Center, said the Smoky Mountains National Park may have to close its gates.
“That’d be terrible,” he said. “That’s not something anyone wants to experience.”
But Gatlinburg won’t likely suffer, he said. With plenty of attractions and hiking trails outside the park, he still expects the city still will be a top tourist destination.
In the Chattanooga area, places such as Chickamauga and Chattanooga National Military Park and Point Park also could shut down, though visitors still would be able to travel through parts of the parks.
Higher interest rates
If the government reaches a compromise by Tuesday, it is still possible the U.S. debt rating will drop, causing interest rates to increase on credit cards, student loans and home mortgages.
“It will definitely have a negative impact on home sales,” said Jennifer Grayson, president of the Chattanooga Association of Realtors. “It would be devastating.”
But local Realtor Cliff Butler sees a brighter future for home interest rates.
“They’re at an all-time low right now, so how much more would they go up?” he said. “It’ll probably definitely affect people, but will they stop buying? I don’t think so.”
But higher interest rates would price some buyers out of the market, and could require those trying to sell a house to have to reduce prices to draw potential purchasers.
Bruce Hutchinson, a University of Tennessee at Chattanooga economics professor, said that over time interest rates would stabilize, but not to the levels Americans are accustomed.
“In the longer term, to the extent there are spending cuts or tax increases, those factors can very much impact and create a new normal,” he said.
Default can be avoided
That normal won’t likely be one in which the government defaults on its debt, as some fear.
“I fully anticipate some type of deal is worked out over the weekend,” said Lauren Templeton, founder and president of Lauren Templeton Capital Management.
Considering the government’s monthly debts and revenues, a $134.3 billion shortfall is predicted for next month by the nonprofit Bipartisan Policy Center. But with the money coming in, the United States is likely to stave off default and pay priority obligations.
“This whole crisis is raising concerns about this government’s ability to resolve not just the short-term debt limit problem but also the long-term fiscal imbalance,” University of Tennessee economist Matt Murray said. “If we go down this path too far, we’re going to see higher interest rates across the board, which will require governments and consumers to spend more just to finance their existing debt. That could hurt everyone.”
The Obama administration could be forced next week to decide which bills to pay. Even if the government continues making interest payments and sending out Social Security, Medicare and pension checks, other services and federal offices could be hurt.
The Tennessee Valley Authority, the biggest federal agency in Chattanooga, is largely immune from the budget battle because the agency has been self-funding for the past two decades. But TVA’s top AAA bond rating could be downgraded if the U.S. debt ratings drop, Moody’s warned this week.
Federally funded road projects also won’t be immediately halted next week if Congress doesn’t reach a budget deal, according to Jennifer Flynn, a spokeswoman for the Tennessee Department of Transportation.
“For the projects that are going on, the money has been budgeted and the contractors are under contract with us,” she said.
The Associated Press contributed to this report.