Preparing for the Unthinkable: A US Default?
January 20, 2013
Squabbling in Washington over the debt ceiling is again raising the specter that the United States may be forced to delay payments on its debt.
While the stigma of a default would be damaging enough to investor sentiment, the chaos from a breakdown in financial markets' systems that might result would be even scarier.
A failure to make payments on U.S. Treasurys, however brief, would create widespread damage in short-term funding markets, which are crucial to daily operations of financial institutions, investment firms and many corporations, said analysts and investors.
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The U.S. has defaulted once before, in 1979, when lawmakers were blamed in part for allowing negotiations to go down to the wire before raising the debt ceiling.
After that, back-office errors at the Treasury, caused the government to be late in redeeming three series of Treasurys bills, according to an academic paper by Terry Zivney and Richard Marcus published in the Financial Review in 1989. The failure caused rates to rise, and the government faced lawsuits from investors hurt by the delays in repaying the bonds, they said.
Markets now are far more complicated. Battles over ownership, interest paid or owed and a host of other issues relating to the transfer of the securities would likely be mired in legal disputes. U.S. debt is also considerably higher, and there is greater foreign ownership of Treasurys. The economy is also more vulnerable, making the risk of a creditor exodus a far more damaging prospect for the country.
"The minute we default, there would be a complete collapse in the bond market," said Peter Schiff, chief executive officer of Euro Pacific Capital and a critic of U.S. government spending habits.
That would leave the U.S. struggling to refinance more than $4.6 trillion that come due within two years, including $3 trillion of Treasurys due to mature in 2013.
In the event of a default, confusion would be rampant as trading systems struggle to identify, transfer and settle bonds that have matured but have not been repaid. Interest rates would surge and investors would likely sell stocks and commodities as they fled risky assets, analysts said.
But that doesn't mean investors would necessarily run to the safety of Treasurys. Many U.S. government bonds could be shunned as investors worry about which issues are in default — even longer-dated issues that could have a coupon payment due that would potentially be in jeopardy.
A default could also trigger a wider paralysis in the financial system that could quite quickly stall the economy, as happened at the height of the financial crisis in September 2008.
For starters, money market funds are not allowed to hold defaulted collateral. These funds pulled back on making loans in 2011, when the ceiling was last an issue, and some analysts fear this time could be worse, potentially creating broad funding problems and send the cost of borrowing in short-term markets — including those in repurchase agreements or loans based on Libor — surging.
The U.S. Treasury hit its $16.4 trillion debt ceiling — the legal amount it is allowed to borrow — on New Year's Eve. The Treasury Department will run short of funds as early as mid-February, so legislation is needed to increase the borrowing limit. This had been a formality for years but turned into a political standoff between congressional Republicans and the White House over government spending levels in the summer of 2011. The resulting battle roiled markets concerned about U.S. political gridlock and its impact on the economy.
The likelihood of a default on U.S. Treasurys has in the past been seen as so low that many parts of the market fail to even account for it in planning and paperwork. For example, unlike other debt, such as corporate bonds, Treasurys documentation has no grace period to make up for missed interest or principal payments.
Many banks and investors may not even have the systems needed to screen out which Treasurys have principal or interest payments due that are most at risk of not being paid.
"No one is going to build a system to assume you have a defaulted Treasury floating around there; it's not a baseline assumption," said Michael Cloherty, head of U.S. interest rate strategy at RBC Capital Markets in New York.
Treasury bills maturing at the end of February and in March are most vulnerable to default, though analysts said hundreds of other issues also have coupon payments due at the end of February. Rates on some short-term debt maturing in that time have risen and now yield more than similar debt maturing in April, a sign that a dislocation has started.
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Rand Paul: GOP Must Evolve
by Kevin Glass
January 20, 2013
Speaking to a New York City radio station, Paul said "we are not popular" while pointedly noting the party's struggles in New England and on the west coast.
"We think the Republican Party needs to evolve and adapt, or we are going to become a permanent minority party... we think a little more of a libertarian Republican, someone who is a strict constitutionalist but also believes in a strong, defensive military but not necessarily in an overly aggressive or bellicose let’s get involved in everybody’s civil war military, I think that has more appeal to independents and some people who have given up in the Republican Party."
The Kentucky Senator has been often mentioned in speculation about frontrunning 2016 GOP candidates. Whether Paul will throw his hat in the ring is obviously still to be determined, but his willingness to criticize his own party has never been hidden.
Read more: http://goo.gl/Od47a
Dems Wary of Gun Control
Gun-control legislation could give some Democratic senators a chance to show they’re independent.
by Katrina Trinko
January 21, 2013
While Democrats have the majority with 55 senators, not all of them appear open to gun-control measures. Earlier this month, freshman senator Heidi Heitkamp (D., N.D.) expressed concern that the White House’s gun-control proposals were too “extreme.” Heitkamp’s concern isn’t shocking. She, like ten other Democrats in the Senate, currently holds an “A” rating from the National Rifle Association. For these senators, seven of whom represent states that voted for Mitt Romney in the election, demonstrating independence from the Democratic party on gun control can help them win votes.
Some of these senators, despite their past voting records, are suggesting a new openness this time around. Senator Mark Warner of Virginia said last month: “I’ve got an A rating from the NRA. But the status quo isn’t acceptable. . . . There’s got to be a way to put reasonable restrictions, particularly as we look at assault weapons, as we look at these fast clips of ammunition.” Joe Manchin, the West Virginia Democrat who famously shot the cap-and-trade bill in a 2010 ad and who also has an “A” rating from the NRA, said earlier this month that “we have to change the culture of mass violence we have,” although he emphasized that gun owners should be respected and that looking at how the nation treats the mentally ill should also be a priority.
However, Manchin isn’t running for reelection in 2014. (Warner is, but thanks to Virginia’s changing population, the state is becoming bluer, giving Warner political leeway on gun control.) In 2014, there will be as many as 21 Democrat senators running for reelection. (The exact number depends on who will retire and who won’t.) Three of them — Mark Begich of Alaska, Tim Johnson of South Dakota, and Warner — currently have an “A” rating from the NRA. Two more, Mary Landrieu of Louisiana and Mark Pryor of Arkansas, have ratings of “C” and “C-,” respectively. Most of their Democratic colleagues have “F”s.
Instead of pushing for new gun-control legislation, Begich last week issued a statement saying he supported “an increase in mental health services as well as strengthening the enforcement of laws already on the books.”
Other Democrats are walking the tightrope between supporting Obama’s gun-control initiatives and positioning themselves for a win in 2014. Take North Carolina senator Kay Hagan, who was elected in 2008. She currently has an “F” rating from the NRA, but gun-control issues have been on the back burner during her term. Now they’re not. In a statement, Hagan was non-committal about whether she would vote for Obama’s approach, calling for a “serious commonsense debate in Congress that looks at access to guns, access to mental health care and violent video games,” adding that “while respecting the rights of responsible gun owners, I am committed to working with my Republican and Democratic colleagues toward a comprehensive approach that ensures our communities are safe.”
North Carolina voted for Obama in 2008 but swung red in 2012 — and not just in the presidential race. In November, the Republican gubernatorial candidate won, as did nine of the 13 House candidates. John Dinan, a political-science professor at Wake Forest University, says that Hagan is likely hoping the gun-control legislation never comes up for a vote. “She’s been able to avoid taking a lot of tough votes because Senate majority [leader] Reid has been able to keep a lot of tough votes from having to be taken,” he comments. But if the legislation does “come to a vote, she’d probably want to split the difference and vote for some parts, and maybe not others.”
One Republican involved in North Carolina politics speculates that Hagan might see a potential upside in the legislation coming up for a vote. “She may want it to come up just because it gives her a chance to show some independence from the administration after four years of voting for Obamacare, for the stimulus, and for everything else. ” However, voting against gun-control measures could hurt her with donors.
Read more: http://goo.gl/rDaLw