This Day On The Street
Continue to site
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

Citigroup Calls Debt Crisis 'Insanity'

NEW YORK ( TheStreet) -- A U.S. debt default triggered by a failure to raise the Federal debt ceiling would be an act of "collective insanity", Citigroup (C - Get Report) economists said in a report Thursday.

Descriptions of a default as a calamity, Armageddon, suicide or insanity is not mere hyperbole, Willem Buiter and Ebrahim Rahbari argue in their note.

"The damage would be so severe, because a default due to a failure to raise the Federal debt ceiling is neither a conventional 'can't pay' default (the country does not have the resources to service the Federal debt in full) nor a conventional 'won't pay' default (when a solvent united government and country "cocks a snook" at its external creditors), but a needless default - we have the resources to honor the debt, we really did not want to default, but we were so busy fighting among ourselves that the deadline passed," the economists wrote in a note.

While most economists still believe a default is unlikely, the probability of the event happening is no longer "negligible", the report said. And even if Congress does raise the debt ceiling, a modest downgrade to AA appears likely at this point.

The consequences of a downgrade to AA won't be as severe as a default, according to the economists, but they would be substantial. The direct response to such a downgrade would result in forced selling by investors with requirements to solely invest in AAA rated securities and an automatic downgrade of assets linked to the US sovereign rating.

Indirectly, it would increase sovereign and private funding costs, heighten risk aversion and reduce faith in the U.S. dollar and Treasuries as safe-havens.

"It is hard to see how the US can overcome the unavoidable fiscal challenges without either experiencing a sovereign debt and US dollar crisis or a recession caused by significant fiscal tightening, or both," they said.

--Written by Shanthi Bharatwaj in New York

>To contact the writer of this article, click here: Shanthi Bharatwaj.

>To follow the writer on Twitter, go to http://twitter.com/shavenk.

>To submit a news tip, send an email to: tips@thestreet.com.

RELATED STORIES:

Disclosure: TheStreet's editorial policy prohibits staff editors and reporters from holding positions in any individual stocks.

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Options Profits

Our options trading pros provide over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • Actionable options commentary and news
  • Real-time trading community
SYM TRADE IT LAST %CHG
C $55.68 0.80%
AAPL $126.60 0.94%
FB $86.91 1.34%
GOOG $521.84 0.26%
TSLA $269.15 0.33%

Markets

DOW 17,757.91 +138.40 0.79%
S&P 500 2,077.42 +14.31 0.69%
NASDAQ 5,013.1230 +26.2560 0.53%

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs