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: email@example.com.
Select the service that is right for you!COMPARE ALL SERVICES
Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.
- $2.5+ million portfolio
- Large-cap and dividend focus
- Intraday trade alerts from Cramer
- Weekly roundups
Access the tool that DOMINATES the Russell 2000 and the S&P 500.
- Buy, hold, or sell recommendations for over 4,300 stocks
- Unlimited research reports on your favorite stocks
- A custom stock screener
- Upgrade/downgrade alerts
Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.
- Diversified model portfolio of dividend stocks
- Alerts when market news affect the portfolio
- Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.
- Real Money + Doug Kass + 15 more Wall Street Pros
- Intraday commentary & news
- Ultra-actionable trading ideas
Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.
- 100+ monthly options trading ideas
- Actionable options commentary & news
- Real-time trading community
- Options TV