Even missing interest payments for a short time would cause real, tangible, lasting harm to the nation's economy

What if the debt ceiling debate causes the U.S. to miss just a couple of interest payments, say for the months of August and September? As long as the Treasury resumes payments in October, then no harm done, right? This misconception was put to rest by the rating agency Fitch in a statement yesterday. The firm makes clear that there's effectively no such thing as a temporary default: the nation's rating will not quickly bounce back.

At this time, the Treasury is already taking "extraordinary measures" to meet its debt obligations, since the debt ceiling needed to be raised in May. In August, those extraordinary measures won't be enough, and the Treasury must prioritize debt payments above its other obligations to avoid default. At that time, the U.S. will be in "effective default"* even if it doesn't miss a payment.

But if the Treasury is forced to (or chooses to) skip a debt payment at that time, serious consequences will follow. If that occurs, real, tangible, lasting harm to the U.S. economy will follow. In past weeks, the rating agencies Moody's and Standard and Poor's have both cautioned that the debt ceiling fight could have serious consequences. But no warning has been quite as clear as that issued on Wednesday by Fitch. Walter Brandimarte at Reuters reports:

"Even a so-called 'technical default' would suggest a crisis of 'governance' from a sovereign credit and rating perspective," Fitch said in a statement. "Clearly the political signals which are coming (from Washington) are a source of concern," David Riley, head of sovereign ratings at Fitch, told Reuters in an interview. Treasury bonds could be rated "junk" by Fitch Ratings if the government misses some $82 billion in debt payments by Aug. 15 due to disagreement over the debt ceiling. The ratings would go back up once the government fulfills its debt obligations but probably not to the current AAA level, Fitch said.

Effective* default would worry the agencies, but a missed payment would result in disastrous consequences. That wouldn't be a temporary problem: Treasuries will not revert back to their AAA-status immediately after the debt ceiling is raised.