"No one … could possibly say that there is no chance of a catastrophic outcome" JPMorgan Chase CEO Jamie Dimon told analysts last week.
The more likely scenario that investors are preparing for is that a temporary deal is struck to lift the debt ceiling. But such a makeshift plan is unlikely to allow the U.S. to maintain its AAA grade with bond rating companies. Citigroup analysts say the odds are 50-50 that the U.S. will be demoted to an AA rating for the first time ever.
Such a downgrade could lead to a temporary market panic
Tuesday, July 26, 2011
I'm in good company
JP Morgan's CEO agrees with me:
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Again, I agree that defaulting on the debt would be a huge deal.
But this bond agency downgrade is a red herring. Bond agencies provide services to investors, to help them evaluate companies that the investors don't know much about.
But the kind of power they wield over mere companies, they simply don't have over the United States. The question is, will China (or hedge funds) buy T-bills, or not, and at what price? What the bond agencies decide really doesn't affect that outcome. It does NOT automatically change anything about the Fed/Treasury's open-market transactions.
The real purchasers of T-bills know that this is all political theater, and the US has access to more than enough wealth to repay its debt. This is nothing like Greece, or like some company which actually may have no way to raise revenue, and which thus has a risk of real bankruptcy no matter what it does.
The government may (stupidly) choose to "default", and not repay some debt (which I don't think is likely at all), but that's far different from real bankruptcy, where there simply aren't sufficient funds, no matter what you do.
The potential bond rating downgrade is not a real threat.
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