The consensus view in the market is that government shutdown
doesn't matter much - been there, done that - but the debt ceiling
issue is the real deal. And the reason for that is that the
consequences of debt default, howsoever temporary or technical,
will be catastrophic for everyone.
The resulting credit downgrade and spiking interest rates will
create a stampede in the market as Treasury bondholders sell their
positions in panic. The market shock and turmoil could very well
exceed what we experienced in the fall of 2008, post the Lehman
bankruptcy. Default would make a thus far risk-free asset into
non-performing, creating a royal mess on banking and corporate
balance sheets. Beyond the immediate effects, one could envision
long-term consequences for the country's economic standing and the
U.S. dollar's global reserve currency status.
All of these are arguments no doubt make a lot of sense, but I am
having second thoughts about how big of a deal a debt default
actually could be. After all, the default will only be a technical
one, resulting from Congress's inability to raise the debt ceiling.
Couldn't the market see through that fog and judge the country's
creditworthiness based on actual fundamentals and not some
technical credit event?
I am by no means suggesting a debt default or applauding Congress's
brinkmanship. But I find it hard to buy into some of the scary
scenarios that will supposedly result from this type default
either. Yes, default will have consequences, but perhaps they will
be far more benign than the Lehman analogies that are being bandied
about. Isn't the market smart enough to tell a real default from a
phony (technical) one?
What do you think?
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