The following is the conclusion from an NBER paper by Anmol Bhandari, David Evans, Mikhail Golosov and Thomas J. Sargent. Published in September, it looked at the relationship between taxes, debts and wealth transfers, and how economic context effects them.
In other words, when it can, or cannot, be helpful to run high debt. Read more
That’s from Nomura, do click to enlarge. They remain optimists even if they do think a solution will only come in the 11th hour: Read more
We’re a little late to this one but what the hell. Here’s an issue of super premium Treasuries maybe saving the day if the debt ceiling hits. Maybe. Read more
This piece of comparative calm is very definitely to be read in conjunction with Cardiff’s post on how the Treasury’s payment system (might) work.
It’s to do with the fact that there is no cross-default clause in US Treasuries. That means a missed payment on one bond would leave the other bonds unfazed, and equally usefully, if needed bonds can be split up into a ‘delayed component’ and a ‘normal component’ .
Pity the EM sovereign with such sloppy protections, eh? Read more
Begin with a snippet from the rates crew at Credit Suisse:
As we understand it, there are three main systems – the Department of Defense Disbursing Offices, the Bureau of the Fiscal Service (which deals with Treasury security related payments), and the Financial Management Service (which makes all other payments). Read more
Ah, how we love the smell of US debt-ceiling drama in the morning.
In a note out on Monday, analysts at Bank of America Merrill Lynch give the chances of a US government shutdown this coming quarter a 30 per cent probability. They add that if it was to occur, it would probably be short-lived with minimal economic repercussions. Also, it’s not like a shutdown hasn’t happened before: it happened once in 1990, as well as once in 1995/1996. It wasn’t the end of the world then, and thus shouldn’t be the end of the world this time either. Read more
To the seasoned finance blogger, US Congressional asshattery lacks the terrifying intrigue it had in 2011.
The world was in worse shape back then. It was pre-LTROs in Europe and high season for Eur-exit speculation, while in the US we were confronting another dispiriting summer slowdown and the legitimate possibility of a double-dip recession. As the possibility that the debt ceiling wouldn’t be lifted in time became frighteningly real, financial markets started flashing signs of acute distress, and consumer confidence cratered. Read more
From a note this morning by economists at Barclays:
The US federal budget deficit has been improving at a dramatic pace in recent months. As a percent of GDP, the deficit peaked at 10.2% of GDP in the four quarters ending in Q4 09; over the past four quarters, it has totaled 4.2% of GDP, down from 7.7% one year earlier. Read more
A cut out and keep chart from Nomura (click to expand):
Timelines are handy. So are specific dates, especially if avoiding catastrophe. Read more
On Wednesday, President Barack Obama’s proposed increase in the federal debt limit was rejected by the House of Congress, by a vote of 239-176, the WSJ reports. However, the vote was largely symbolic as the increase would need to be rejected by by two-thirds majority in both the House and Senate in order to be blocked. The provision for the President to push through increases in all but staunch opposition, was agreed in a bipartisan deal last August in order to ensure that the government would not default on its obligations. A vote will be held in the Senate next week. The WSJ quotes Republican Jared Polis as saying, “We’re here playing this game of Kabuki theater, this is all fun and games, but the country is burning.” The increase requested is for $1,200bn – an amount that would cover costs until after elections in November, and would see the government’s borrowing limit move up to $16,394bn.
American politicians on Thursday reached a tentative deal to fund an array of government agencies through September 30 and avert shutting down many of Washington’s operations starting this weekend, reports Reuters. Democratic Senator Daniel Inouye, one of the chief negotiators on the massive spending bill, told reporters the deal had been struck and the full Senate could vote on the measure as early as Friday. The House of Representatives is expected to vote on Friday, a Republican aide said. Current funding for agencies ranging from the Defense Department and Homeland Security to the Environmental Protection Agency expires at midnight on Friday. Meanwhile, work on a separate but equally important deal to extend a payroll tax cut and long-term unemployment benefits continued in Congress. Bloomberg says Senate Majority Leader Harry Reid told reporters the Democrats are considering a two-month extension of an expiring payroll tax as well as unemployment benefits if they are unable to strike a deal on a longer-term plan with Republicans.
Not good, not good at all.
From Morgan Stanley’s US rates team on Tuesday: Read more
Some debt doom and gloom from Independent Strategy’s Bob McKee…
The spectre of an imminent US default on its debt disappeared as legislation to increase America’s borrowing authority cleared its last remaining hurdle in the Senate and was signed by President Barack Obama, the FT says. The last-minute congressional approval of an increase in the debt ceiling came after weeks of aggressive political rhetoric and fraught negotiations over fiscal policy that carried the country to the brink of a potential economic calamity, threatening its triple A credit rating and the status of Treasury bonds as a safe harbour for global investors. Bloomberg adds that for all the debt ceiling debate, the people with the most at stake made more money buying Treasury securities in July than any month this year.
China’s central bank governor urged Washington on Wednesday to act responsibly to deal with its debt issues, saying uncertainty in the US Treasuries market will undermine the international monetary system and hamper global growth, Reuters reports. The remarks by Zhou Xiaochuan, head of the People’s Bank of China, were China’s first official response to the passage of the US debt ceiling deal. Mr Zhou welcomed US progress in dealing with its debt problems but urged Washington to take what he called “concrete and responsible” measures to bolster confidence in Treasuries, of which China is a major buyer. Mr Zhou said China would watch developments related to the US debt-ceiling increase while continuing to diversify and strengthen risk management of its foreign exchange reserves, the WSJ reports.
The spectre of an imminent US default on its debt disappeared as legislation to increase America’s borrowing authority cleared its last remaining hurdle in the Senate and was signed by President Barack Obama. The FT reports that president vowed to continue battling for tax increases on the wealthy to be part of the mix in the second phase of congressional negotiations between now and November to produce additional savings for the government. No new revenues were contained in the initial package because of opposition from Republicans. The occasion failed to allay market concerns about poor growth, which were compounded by data showing an unexpected fall in consumer spending, says Bloomberg. US equities closed lower and gold and the Swiss franc climbed. In Asia, the Nikkei fell more than 2 per cent to a five-week low, Reuters reports. However the strain in short term money markets eased, says the FT.
Big oil companies, pharmaceuticals businesses and hedge fund managers seemed to be spared immediate pain by the debt-ceiling legislation that was passed in the House on Monday night after Democrats failed in their attempt to include tax increases and other measures, the FT says. But companies such as ExxonMobil and Carlyle still face the risk of being stripped of some favourable tax perks by the second step of deficit reduction, in which a joint committee will be mandated to form a plan for $1,500bn in extra savings by November’s end. The committee is expected to at least consider long-term changes to Medicare, according to Nurse.com, which could impact pharma firms.
The US looked set to avoid a potentially catastrophic default on its debt and a permanent stain in its global standing after the House of Representatives voted to increase the debt ceiling by a comfortable margin following weeks of heated negotiations and brinksmanship, the FT reports. The legislation, which would cut spending by $2,400bn over 10 years and increase the debt ceiling until 2013, was due for a final vote in the Senate on Tuesday, where it was also expected to pass with a strong majority. Barack Obama, the US president, could enact the legislation ahead of today’s midnight deadline. The LA Times reckons the deal may avert default but does little to solve the US’s economic woes, while Bloomberg fears the US government has become “hyper-polarised.” Reuters adds that the agreement could trigger a battle over tax reform within weeks and turn Washington once again into a dateline for deadlock.
As has been noted everywhere, the debt deal approved by the US House of Representatives on Monday night holds little promise of achieving the $4,000bn in spending cuts that ratings agencies are thought to be wanting. Standard & Poor’s, the agency which put the $4,000bn number out there, has since backed away from it a little, but not in such a way that guarantees they will do nothing, either.
Mohamed El-Erian said on Monday he suspected S&P was “under enormous pressure” not to go ahead with the downgrade. He’s not the only one — S&P’s president, Deven Sharma, was asked about when he appeared before Congress last week (he denied it, of course). Read more
The US looked set to avoid a potentially catastrophic default on its debt, the FT says, after the House of Representatives voted 269 to 161 to increase the debt ceiling on Monday night. The legislation is expected to easily pass a Senate vote on Tuesday. However the news failed to distract investors from worse than expected US manufacturing data earlier in the day, and equities in Asia opened lower. The FT points out that the thorny question of whether tax cuts are really on the table has again raised its head, even before the committee is formed. The NYT says the political division highlighted by the debt ceiling stand-off is raising pressure on the Fed to address the nation’s economic woes.
President Barack Obama announced on Sunday night that US Congressional leaders had reached an agreement on a tentative deal that would raise the US government’s borrowing limit and avoid a US default, prompting a positive response from Asian financial markets, the FT reports. The proposed cuts meant the US’s annual domestic spending will fall to the lowest level since Dwight Eisenhower was president in the 1950s, Obama said in a speech. The deal hammered out, which is to be voted on in both houses on Monday, would see the $14,300bn debt ceiling raised by $2,400bn in two stages but would avoid another drawn-out negotiation before the presidential election in November 2012, a key Democratic demand. In return, Republicans would get $2,800bn in spending cuts over the next 10 years.
The Confederation of British Industry has cut its forecast for UK economic growth, the WSJ reports, because it believes companies have lost confidence and curbed their activity in response to global shocks such as the eurozone debt crisis, the US debt ceiling negotiations, and the Japanese tsunami. The CBI cut its forecast for 2011 to 1.3 per cent from the 1.7 per cent that it predicted in May. However the CBI also said businesses will soon start to invest the stockpiles of cash that they have built up in recent years, which will help growth rise to 2.2 per cent in 2012. It forecast “relatively modest investment growth” of about 4 per cent this year, rising to 9 per cent in 2012, the FT reports.
UK retailer John Lewis proudly boasts that it has never been knowingly undersold in the market. Its retail prices, consequently, can be used by consumers as a benchmark to compare all other retail prices against (yes, we know, the mantra doesn’t apply to their website prices, but you see our point.)
So, applying the same philosophy to financial markets, you could say, the US is the global markets’ version of John Lewis. Its securities provide the prices against which all other securities in the world are priced. Read more
Republican leaders in the House of Representatives on Thursday abandoned efforts to vote on a plan to raise the nation’s borrowing authority, deepening the US debt ceiling crisis five days ahead of a possible default, the FT reports. Several days of arm-twisting by top Republicans failed to quash a rebellion by conservative lawmakers, who say the plan remains short on spending cuts and lacks a constitutional amendment to force a balanced federal budget. With markets increasingly unnerved about the lack of progress, pressure is rising on the White House to make a new effort to broker a deal, after allowing Congress to take the lead for several days. Asian stocks fell on the news, reports Bloomberg.
Wall Street bankers, from senior executives to traders, are complaining that the Federal Reserve is refusing to engage in scenario planning for a US downgrade or default, the FT says. With days until the Treasury’s August 2 deadline to raise the debt ceiling, bankers say they are not getting a response to efforts to discuss the market impact of a failure to reach a deal in Washington or if credit ratings agencies cut the US triple A rating. They want to address contingency planning for a run on money market funds that hold Treasury bonds, the impact on capital and liquidity ratios if there are large inflows or outflows of deposits and the potential effect on short-term financing from any problems in the repurchase, or “repo”, market.