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Debt Ceiling Uncertainty Hits State Budgets

This post was originally published on the Public Notice: Bankrupting America Blog.

Fruitless debt ceiling negotiations have left state governments and citizens searching for certainty in the face of a possible federal default and credit downgrade.

As reported by USA Today, a downgrade would leave states, as well as “7,000 cities, counties, universities, and non-profits” facing steeper borrowing costs from higher interest rates.

Following a downgrade, at least one economist believes that interest rates would “go up almost across the board,” which would leave everyone paying more for “auto loans, mortgage loans, business loans, [and] lines of credit.”

In what would be a vicious circle, higher borrowing costs could lead to a greater need to borrow, as a default would threaten cash flows to strapped state budgets that receive close to 35 percent of their revenue from the federal government.

Maryland Gov. Martin O’Malley expressed his frustration about not having a “list of what [federal] checks are going to go out,” with such uncertainty making it “not possible at this point for us to make contingency plans.”

The uncertainty left New Jersey Gov. Chris Christie lambasting politicians in Washington for “engaging in a bunch of brinksmanship,” at a time when  “we are all just guessing” about the impacts of failing to raise the debt ceiling.

Bloomberg described planning by other states if the worst-case scenario becomes reality. Those plans range from a $1 billion credit line in Arizona, a preemptive $5.4 billion loan taken by California, and a strategy to furlough “all but the most essential workers” in South Carolina.

Whatever occurs after August 2nd, the uncertainty surrounding a default and downgrade is not encouraging a climate of job creation and recovery. The message to Washington is clear: the time is up for partisan bickering. Come to an agreement and restore the economic certainty necessary for a recovery to take hold.

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