Wednesday, October 16, 2013

Wall Street and "default"

Here's a good article that explains some of the nitty-gritty of how Wall Street would deal with non-payment of Treasuries during a budget dispute:
Key quote: "A Treasury default would be deemed technical because it would be the result of the government's unwillingness, not its ability, to pay. In a technical default, only the prices of Treasury bonds that mature or have coupon payments would likely fall, according to the analysts. Money-market funds wouldn't be forced to sell government bonds, and the Fed probably would continue accepting them as collateral for emergency cash."
Even better, no real need for Treasury to "prioritize payments". As the article notes, "During the 2011 debt ceiling debate, Treasury officials said delay was the most feasible of bad alternatives, according to a report written by the Treasury's Office of the Inspector General. Under this alternative, no payment would be made until all payments due that day could be paid." As the article also notes, "If the Treasury gives a day's notice on payment delays, that would also prevent the $2.6 trillion-a-day Treasury repurchase agreement market from seizing up, according to JPMorgan." That's about all Treasury has to do – give a day's notice.
In short, not a big problem at all. It's more of an embarrassment problem for Obama that it happened on his watch and under his "leadership" – even if he can blame the Republicans and the Tea Party.
Of course, this is just for a short-term dispute, like days or weeks, not months or years.
A budget/debt deal is still quite likely, but I suppose it is quite possible that the House might feel the need and political advantage of forcing the vote to fail at least once or twice and drag a successful vote out past the October 17 date to force Treasury into "technical default"... just because they can.
So, Treasury may be forced to give its "one day notice" Wednesday morning or 24 hours in advance of whenever its "zero balance" point really is. I mean, the October 17 date was always really just a front for resisting negotiations.

-- Jack Krupansky


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