Menace

from Le Nouvel Observateur

by Donald Hébert

'translation': Doxa-louise

4-10-2013


UNITED STATES. A paiement default would amount to Lehman Brothers tenth power
'The ripple effect would be immediate and very violent', explains Thibault Prébay,a specialist in stock market affairs. The interview.
A strange ambiance reigns in Washington, where the government has closed down part of the federal administration beacause of a lack on budgetary accord in Congress. In this showdown climate between Republicans and Democrats, a due date looms: as of october 17, the United States will no longer be able to borrow unless the debt ceiling is raised. A scenariofor bankrupcy with consequences so terrible that it appears improbable for Thibault Prébay, directeur of the department for rates on  Ireturns at Quilvest Gestion.


How is it that the United States could be bankrupt?
An anomaly in this world, the United States have chosen to put a ceiling on their debt, that isthe government cannot borrow over a certain sum without the approval of Congress. And now the latter is partly controlled by the Rebublicans, of whom a certain number would liketo see Barack Obama put off his reform of 'Med Insurance', which the latter refuses to do. If this stalemate goes on, the United States will no longer be able to borrow as of October 17. Indeed they will no longer be capable of paying off already contracted debt. This would be a paiement default.


Could this really happen?
It is extremely improbable. Such discussions happened a number of times in the past, although this time the shutdown on the budget adds a colorfull note. Every time, the party blocking the situation comes to antagonize public opinion. All the more because it is countering a decision of an elected president.


What would transpire if it did happen?
The government would find it impossible to propose a budget that incurs a deficit, which can only be financed by borrowing. it would have to reduce public spending on the order of 4% of GDP(GrossDomestic Product). Barack Obama then has the possibility to ground his position on the constitution, which holds that the State must meet its obligations, and thus re-imburse its creditors. The down side risk: if this argument is not deemed legally sound, he risks destitution. Finally, the federal State can tell its borrowers, that it cannot pay.


Then what?
In actual fact, markets allow one day, in the case of technical problems. Then, the government needs to declare a selective default: it proposes to pay off everything, exceptfor a certain debt which will be payed later. if it cannot in this case, it declares default. Thebonds emitted go over their time limit until the United States has renegociated with all creditors.


What would be the consequences?
The cRating agencies would put the United States at the bottom of the ratings list.No one would want to advance funds to them, and the value of their 'sovereign' (cf ' dSouveraine) bonds would go down. This would create a hole in the holdings of banks worldwide, who are obligated to hold some for stability purposes. Many would go bankrupt, taking others with them. in many countries, the healthcare systems and pension plans which holds such bonds would no longer be financed. The riplling out would be immediate and very violent. In comparison, the downfall of Lehman Brothers or Greece would appear ridiculous. And the American State would be paralysed. Bring down the planetary economy, all that over putting off Obamacare by one year? it is impossible to countenance that Congress could be incapable of reaching accord.


Yet Barack Obama has counselled Wall Street on the troubling behaviour of the Republicans. The extremist members of the 'Tea Party' faction seem capable of anything...
It is in the interest of each to remain inflexible, so that the other side seems responsible for the blockage. But that doesn't really worry financial markets. Fluctuations in the past few weeks are mainly due to uncertainty as to the potential for growth in the US. If the Stock Market was taking the menace seriously, that would translate into a drop of at least 15%.