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U.S. Sovereign Debt Risk Re-Rating, Technical Default is Virtual Certainty

Interest-Rates / US Debt May 24, 2011 - 02:03 AM GMT

By: Bloomberg

Interest-Rates

Best Financial Markets Analysis ArticleDavid Stockman, budget director under President Reagan, appeared on Bloomberg Television to discuss the latest developments in the deficit/debt debate. Stockman said there is sovereign risk on the debt of the United States and that both political parties in the U.S. are advocating “de facto default” by pointing fingers at each other.


On the debt ceiling negotiations in Washington D.C.:

"Between now and November 2012, it is virtually certain [Congress] can't pass a large, permanent increase in the debt ceiling. We'll have periodic short-term fixes, a month, two months, and then they'll back to squabbling and this enormous political battle we're having over the major components of the budget: revenues, Social Security, Medicare and so forth. It will be back to the same old gong show.”

"I don't have any hope they'll come to a substantive agreement on the big things that need to be done because both parties have ruled off the table the essential things that are necessary.”

“We have to raise revenue, there is no doubt about that. We have to allow the Bush tax cuts to expire for everybody, not just the rich. We have to reset Social Security if we're doing to make any headway in denting this massive, $6 billion a day borrowing spree we're on… Neither [political] party is facing up to the real truth or telling the public."

On broadening the tax base through VAT taxes or taxes for Wall Street:

"At the moment it is very unlikely [that any of these taxes will be implemented], but that is simply a measure of how unrealistic the debate is down in Washington today."

"If they were realistic, they would be discussing what are the new revenue sources we can possibly tap in order to fill this gigantic $1.5 trillion hole in the budget. What are the pros and cons, what are the tradeoffs? You hear none of that discussion. They're whistling past the grave. They should be talking about new sources of revenue and possibly increasing some of the existing taxes we have in place today."

On when Washington will get to the point of discussing raising taxes:

"I think [Washington will discuss raising taxes] only when we get a major, thundering conflagration in the bond market."

"For the last 10 years, Congress has been lulled to sleep by the central banks that keep buying all the debt and therefore holding down the real cost of interest on the middle and long term debt that we are issuing every day.

"And frankly, bond fund managers who somehow think that the tooth fairy is going to arrive and fix this problem, when it's clear that is not going to happen, and that we have sovereign risk on the debt of the United States, just as clearly as the world is now discovering there are sovereign risks in the European debt issues and so forth."

On whether there will be a 9/11-style crisis in the economy:

"That kind of crisis would be a vicious sell-off in the global bond market. That could come sooner than people think, because the Fed is getting out of the market with QE2 ending.”

"For the last six months, the Fed has bought nearly 100% of this $6 billion a day that's been issued. Once they are out of the market, where is the new bid, where is the new demand going to come from? The Chinese are getting out of the market because finally they are having to deal with the rip-roaring inflation they have had. The people's printing press of China will not be buying as much U.S. debt because of its own internal problems.”

"When we get to real investors, what are some of the real investors saying today? PIMCO is short the bond, they're selling, they're not buying.

"When we get into a two-way market when real investors began to look at real risk, begin to look at the gong show in Washington and the magnitude of the gap that we are borrowing, I think we 're going to get a re-rating of sovereign risk. We're going to get a huge dislocation in the global bond market, and then maybe the wake-up call will finally come."

On political problems in solving the debt problem:

"The problem is not the debt ceiling. When push comes to shove, at the 11th-hour, they will do it for a couple of weeks or months and we will have a little more borrowing headroom and will be back to the same impasse where we are now."

"The real problem is the de facto policy of both parties is default. When the Republicans say no tax increases, they're saying we want the U.S. government to default. Because there isn't enough political will in this country to solve the problem even halfway on spending cuts.
When the Democrats say you can't touch Social Security, when you have Obama sponsoring a war budget for defense that is even bigger than Bush, then I say the policy of the White House is default as well."

"That is the question that really needs to be understood better and appraised by the bond market. Both parties are advocating default even as they point the finger at each other."

bloomberg.com

Copyright © 2011 Bloomberg - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments

gAnton
29 May 11, 21:25
Ben´s Pïgeons

Look at the numbers--true unemployment (percentage of employable Americans who actually have jobs), total US debt (governments at all levels, housing market debt (25% of all mortages "under water"), etc., etc.). And all these negative trends are increasing. It should be obvious to all that things are much worse than they were two years ago when the housing crisis first became painfully obvious, and that all these downward ecoomic trends are continuing. In other words, the problem aspects of the economy have gotten much worse, and all of Bernanke´s efforts to "recover" the economy have been counter productive!

One of Bernanke´s main ideas was that if he restored the banking system, it would "pull up" the real economy. But just the opposite has occurred--the banking system has done very little for the real economy, and a declining real economy has tended to pull the banking system down along with it. The only saving factor that has buoyed up the banking system is a tremendous amount of government subsidies (such as negative interest rates, buying up worthless securities, etc.).

To retain the appearence of a healthy banking system, the subsidies must continue, but to do so is becoming increasingly difficult politically and is putting the entire monetary system in jeopardy.

Good luck, Ben! Cleaning up after your pigeons which are coming home to roost should keep you busy for a long, long time.


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