The Impact of Default

 

Greece’s sovereign debt was downgraded to CCC by Standard & Poor’s on Monday, making it the worst credit rating in Europe and the worst in the developed world. Yet, when it comes to credit downgrades and talks of default, the country the entire world is watching is right here, in the AAA rated never-missed-an-interest-payment US of A.

What impact would a US default have?

Some experts have predicted a major panic. Standard & Poor’s has made it clear that it would cut the US rating from AAA (the top) to D (the bottom). That would mean banks would technically be barred from using US debt as collateral with central banks (although these rules could be changed). As Gary Jenkins of Evolution Securities put it: “They wouldn’t dare, would they?” Even Bernanke has conceded that failure to lift the US debt ceiling would throw the financial system into tremendous disarray.

If Congress fails to balance the debt, the government would have to stop, limit, or delay payments on a broad range of legal obligations, including Social Security and Medicare benefits, military salaries, and interest on the national debt, which is paid to big, market maker banks like J.P. Morgan Chase, Citibank, and others, not to mention the government of China, which is the largest holder of US government bonds overseas. Defaulting on those obligations, including coupon payments to bond holders, would cause severe hardship for the US economy. It would erode the historic legacy of the US as the safe harbor within the global financial system.

How has America been keeping afloat since May, when the debt ceiling was reached?

By stopping payments to certain federal pension schemes, and by liquidating some of the scheme’s assets. Treasury secretary Tim Geithner has pledged that the shortfall will be repaid once the ceiling is raised.

How urgent is the situation?

The US treasury estimates that funds will dry up on 2 August. However, the deadline is actually 22 July– to give time for legislation to be written and approved.

As a Mortgage Banker, I am counting on the next couple of weeks  to be very volatile with re pricing multiple times per day.  Now is an excellent time to get your applications in so your Mortgage Specialist can lock your loan at the perfect time.

 

 

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s