Tuesday, October 8, 2013

How Long to Default

I don't think you should assign much weight to the belief that budget/debt ceiling debate remains unresolved. As in the recent past, the statist on the left and right will likely come to an agreement somewhere in the zero hour.

Now with that said, soberlook.com presented the below analysis of how long it would take the US government to default if the debt ceiling is not raised. it does throw cold water on the President's notion that raising the debt ceiling does not raise the national debt.

How long will it take for the US Treasury to run out of funds if the October 17th deadline comes and goes without an increase in the debt ceiling? The answer is - less than a couple of weeks.

Source: Barclays Research

Fitch Ratings: - A formal review of the rating with potentially negative implications would be triggered if the US government has not raised the federal debt ceiling in a timely manner prior to when the Treasury will have exhausted extraordinary measures and cash reserves. According to official comments by the US Treasury secretary, extraordinary measures could be exhausted by 17 October.

In such a scenario, the Treasury would be forced to dramatically cut back on current spending with adverse implications for the economic recovery. Even if it were to prioritise debt service - something the Treasury has repeatedly stated it has neither the legal authority nor logistical capability to do - it would likely incur arrears on a range of payment obligations and thus continue to incur debt, but in a disorderly and disruptive manner.

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