(04-10-2013, 10:40 AM)ForeverAlone Wrote: guys what happens if 2 weeks later the debt ceiling is not raised?
so far my conclusion is that noone knows.
on one hand, Jacob Lew (the Secretary of Treasury) says that all extraordinary measures will run out by then and so the G will not have enough cash to pay the coupons on the Treasuries due. So there's a default of UST.
on the other hand, there is a view that Obama can always invoke Section Four of the Fourteenth Amendment and assert authority to breach the debt ceiling to pay “the public debt of the United States, authorized by law”. (copied from
http://www.theatlantic.com/politics/arch...aw/280176/)
Also, 2 days ago on Bloomberg, David Stockman (ex-OMB director under Reagan) says that there's always a way for the Treasury to rearrange the payment of stuff and so the coupons can always be paid if the G forces it.
so unless you are a member of the Treasury and knows the inside out of the pecking order of the Treasury payments, i doubt anyone really knows whether a default is on the cards.
However, what is clear is that
IF a default occurs, there is going to be chaos. First, tons of hedgies/mutual funds/real monies will not get the cash into their books. That is going to be a disaster. Second a downgrade of the UST should happen and some funds might no longer be willing to hold the UST if they are mandated to take only AAA debt - so looks like sell UST, sell USD, buy other AAA sovereign. Then of cos if the UST yield curve shifts because of the selldown, risk premium will be repriced since everything is priced off the UST curve.