July 14, 2011

U.S. Debt Default: Probability No Longer De Minimis

By EconMatters

Commodities, stocks climbed, and gold also jumped to a record near $1,590 an ounce after Fed Chairman Ben Bernanke, in his testimony to Congress, said the Fed was ready to inject more stimulus if the economy weakens.

Then Moody's came along and spoiled the party by putting the rating of the United States on review for a downgrade.  Moody's said it sees a "rising possibility that the statutory debt limit will not be raised on a timely basis, leading to a default on U.S. Treasury debt obligations." The probability there will be a default on interest payments is low, but it is "no longer to be de minimis."

The other two big western credit agencies had previously issued similar warnings.  Standard & Poor's placed the U.S. rating on negative outlook on April 18 which meant a downgrade is likely in 12-18 months.  In June, Fitch Ratings also warned that the nation’s triple-A credit rating would be endangered. 

However, none of them actually followed through and the U.S. still earns the top AAA ratings from all Big 3.  China's Dagong Rating Agency who has been highly critical of the Western credit agencies, is the only agency in the world that actually downgraded the U.S. sovereign debt rating,  not once, but twice--from AAA to AA in July, 2010 and, from AA to A+ in November 2010 after Fed's QE2.

The political specter at Washington over the government budget and debt ceiling has spooked the markets and formed a rare united front by China's Dagong Rating Agency, and the Big 3 in the West--Moody's, Standard and Poor's and Fitch.  Echoing Moody's latest move, WSJ reported that Dagong is putting U.S. sovereign debt on negative watch for a possible downgrade. 

During a "Twitter Town Hall" session, President Obama warned that not raising the $14.29 trillion debt ceiling would lead to "a whole new spiral into a second recession or worse".  It seems the odds are getting better each day as the debt ceiling deadline approaches that the U.S. Congress might actually go for an unprecedented debt default. 

So what happens if the U.S. goes bankrupt?  Here is an infographic to help answer that....for starters.   .          
Source: Neogaf
Further Reading - National Debt = Great Recession 2.0

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