Until recently, bankers were seriously concerned about the possibility that the United States would break its $14.3 trillion debt ceiling and default. Now they’re OK with it.
Analysts such as Chris Whalen argued against raising the debt ceiling, which is under discussion among lawmakers at present.
Bank of America's Jeffrey Rosenberg has become less concerned as has hedge funder Stan Druckenmiller, bond guru Jeff Gundlach and Rep. Paul Ryan, R-Wis.
Now, Citi analyst Steven Englander is joining the chorus.
In the short-term, markets would react to a default.
“Two months ago there was a virtual consensus that a debt ceiling breach would be an unmitigated disaster for U.S. asset markets,” Englander says, according to Business Insider.
“Confidence in Treasurys as the ultimate safe haven would be destroyed and there would very likely be spillovers into other asset markets.”
Yet the fallout would clear.
“A breach of the debt ceiling would magnificently concentrate the minds of Congress and the administration to reach a speedy deal on longer-term fiscal consolidation. In this view, if brinksmanship or even a few days delay in receiving a payment were the cost of long-term reform, it would be worth it. Longer-term attractiveness of Treasurys might even be enhanced if the deficit were put on a sustainable course.”
Treasury Secretary Tim Geithner, however, says default is unthinkable and adds that Congress must raise the debt ceiling to avoid a default.
Treasury Secretary Tim Geithner
(Getty Images photo)
"It simply is not an option for Congress to evade the basic responsibility to protect America's creditworthiness," says Geithner, according to CNNMoney.
Geithner said the government could get by with bookkeeping maneuvers like that through Aug. 2. After that, the government could default on its debt for the first time, threatening the national credit rating and the dollar.
If it doesn't raise the limit, Congress would have to come up with $738 billion to make up for what it planned to borrow through the end of the fiscal year on Sept. 30, the Associated Press reported. The options are drastic: Cut 40 percent of the budget through September, which might mean defaulting on payments to investors in government bonds; raise taxes immediately; or some combination of the two, the AP reported.
"In the economic area, this is the equivalent of nuclear war," Edward Knight, who was the Treasury Department's general counsel during a standoff over the debt ceiling in the mid-1990s, told the AP.
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