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.



Maine Mortgage Market Update 11.23.2010

Mortgage bond prices opened higher Tuesday morning applying downward pressure to mortgage rates. Rates are finding support following an incident where North and South Korea exchanged artillery fire overnight. In times of global uncertainty, traders seek the safety of US debt. This is call flight to safety buying. Lets hope the US is always seen as a safe place to park money.

In news released this morning, the US economy expanded at a 2.5% rate in the third quarter. This data was near expectation for a read of 2.4% and had no effect on trade.

Market analysts are now waiting for stocks to begin trade at 9:30 am ET and for the release of existing home sales data set for 10:00 am ET to help gauge interest rate direction. This afternoon the Treasury will auction $35B in 5-year notes with results by 1:15 pm ET.