Tags: us | economy | Druckenmiller | Beltway | Deal | Debt

Druckenmiller Fears a Beltway Deal on Debt, Not US Default

Tuesday, 17 May 2011 12:39 PM

Don’t worry about a short-term, technical default on U.S. debt, says hedge fund giant Stanley Druckenmiller. Instead, worry about a Beltway deal to keep spending.

That’s the outlook of the former fund manager for George Soros, credited for helping Soros short the British pound in 1992, and once manager of his own $12 billion fund, Duquesne Capital.

In a recent interview with The Wall Street Journal, Druckenmiller posed two possible outcomes of the current scrap to raise the U.S. debt ceiling.

In outcome No. 1, politicians fail to make a deal on the rapidly approach debt ceiling, forcing Treasury into a corner while Congress battles it out. Payments on Treasurys go into “technical” default, meaning a delay of a few days or perhaps two weeks in interest payments.

Borrowers know they will get paid, Druckenmiller said, but they also feel like Congress is taking the spending situation seriously enough to tackle entitlement spending and “get its house in order.”

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Treasury Secretary Timothy Geithner
(Getty Images photo)
“I know I'm going to get massive cuts in entitlements and the government is going to get their house in order so my payments seven, eight, nine, 10 years out are much more assured," says Druckenmiller, who notes he is currently long Treasurys.

The alternative scenario, he said, is much, much worse. The debt limit is immediately increased, but spending isn't addressed in any serious way.

"I don't have to wait six, eight, or 10 days for one of my many payments over 10 years. I get it on time. But we're going to continue to pile up trillions of dollars of debt and I may have a Greek situation on my hands in six or seven years,” Druckenmiller said. “Now as an owner, which piece of paper do I want to own? To me it's a no-brainer. It's piece of paper number one."

Treasury Secretary Timothy Geithner is ringing alarm bells across Washington, warning of a disastrous outcome if an agreement to raise the debt ceiling isn't made soon.

“A default would call into question, for the first time, the full faith and credit of the U.S. government,” Geithner wrote in a letter to Friday to Sen. Michael Bennet, D-Colo.

“As a result, investors in the United States and around the world would be less likely to lend us money in the future. And those investors who still choose to purchase Treasury securities would demand much higher interest rates.”

Speaker of the House John Boehner on Sunday challenged the White House to come up with enough spending cuts to offset a debt ceiling hike. The current limit is $14.3 trillion. Treasury earlier estimated that it would need an extra $2 trillion to avoid asking for another increase prior to Election Day 2012.

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Don t worry about a short-term, technical default on U.S. debt, says hedge fund giant Stanley Druckenmiller. Instead, worry about a Beltway deal to keep spending. That s the outlook of the former fund manager for George Soros, credited for helping Soros short the British...
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2011-39-17
Tuesday, 17 May 2011 12:39 PM
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