Post-default scenarios
Jul. 29th, 2011 12:00 pm![[personal profile]](https://www.dreamwidth.org/img/silk/identity/user.png){kind=small}
nairiporterGlobal slump warnings if US triggers 'insane' default
http://www.telegraph.co.uk/finance/financialcrisis/8669352/Global-slump-warnings-if-US-triggers-insane-default.html
A chorus of global banks has warned that Washington risks triggering a global slump and may suffer permanent loss of credibility by flirting with default on America's $14.3 trillion (?8.8 trillion) federal debt.
...
The dangers are almost as great if the US fails to lift the debt ceiling and avoids default by enacting the most drastic fiscal squeeze in modern history.
"Default would be an act of collective insanity," said Willem Buiter, Cititgroup's chief economist. "Even if a default were cured promptly, it would severely dent the credibility of the US as a global financial player and the provider of the world's leading reserve currency. There would be an immediate repricing of the dollar and an increase in medium and long-term nominal and real interest rates. Asset, credit, and funding markets in the US and the world as a whole would likely suffer and a global recession would likely result, centred in the US, but not restricted to it."
Mr Buiter said brinkmanship on the US debt ceiling had reached a point where tail risk had "morphed" into a serious possibility, with a 5pc likelihood that Washington will pull the trigger on a technical default.
...
Citigroup said the most likely outcome (60pc chance) of the Washington drama is a rise in the debt ceiling with a small fiscal package below $2 trillion that makes "no material difference" to the US debt trajectory and fails to satisfy rating agencies. This will lead to a downgrade from AAA to AA "initially".
The damage to confidence would stifle growth for the next two quarters and open the way to fresh Fed stimulus early next year.
Mr Buiter said the chances of a "rosy scenario" where the debt ceiling is lifted, the US implements a credible bipartisan package, and there is no US downgrade, is a miniscule 1pc.
http://www.telegraph.co.uk/finance/financialcrisis/8669352/Global-slump-warnings-if-US-triggers-insane-default.html
A chorus of global banks has warned that Washington risks triggering a global slump and may suffer permanent loss of credibility by flirting with default on America's $14.3 trillion (?8.8 trillion) federal debt.
...
The dangers are almost as great if the US fails to lift the debt ceiling and avoids default by enacting the most drastic fiscal squeeze in modern history.
"Default would be an act of collective insanity," said Willem Buiter, Cititgroup's chief economist. "Even if a default were cured promptly, it would severely dent the credibility of the US as a global financial player and the provider of the world's leading reserve currency. There would be an immediate repricing of the dollar and an increase in medium and long-term nominal and real interest rates. Asset, credit, and funding markets in the US and the world as a whole would likely suffer and a global recession would likely result, centred in the US, but not restricted to it."
Mr Buiter said brinkmanship on the US debt ceiling had reached a point where tail risk had "morphed" into a serious possibility, with a 5pc likelihood that Washington will pull the trigger on a technical default.
...
Citigroup said the most likely outcome (60pc chance) of the Washington drama is a rise in the debt ceiling with a small fiscal package below $2 trillion that makes "no material difference" to the US debt trajectory and fails to satisfy rating agencies. This will lead to a downgrade from AAA to AA "initially".
The damage to confidence would stifle growth for the next two quarters and open the way to fresh Fed stimulus early next year.
Mr Buiter said the chances of a "rosy scenario" where the debt ceiling is lifted, the US implements a credible bipartisan package, and there is no US downgrade, is a miniscule 1pc.
