Comments on: Moody’s latest to reassess Treasury security risk

By: J. Strupp

J. Strupp — Wed, 08 Jun 2011 02:24:51 +0000

You’re correct. S&P downgraded their debt outlook and not our actual bond rating. I’m going to make the assumption that an actual downgrade will also be shrugged off if it actually occurs.

I don’t believe the Chinese are interested in a default in either scenario and I’m really not interested in floating the idea out there to global markets that the U.S. is contemplating not making good on it’s debt payments. Messing with the full faith and credit of U.S. treasuries is a terrible idea for everyone involved.

By: steveegg

steveegg — Tue, 07 Jun 2011 11:05:52 +0000

In reply to J. Strupp.

Point of order, S&P hasn’t moved the actual rating yet, just their outlook on the debt (unless there’s something else I missed).

As for the bond market, I know the Chinese don’t speak for everyone, but they’re not wholly-opposed to a very-short-term technical default on interest if (and only if) a long-term solution is a result. What they’re afraid of is that the proverbial can will continue to be kicked down the road and over the cliff.

To put it in bankruptcy terms, if a default were “inevitable”, they would rather take a very short Chapter 11 now while a relatively minor reorganization would put the country on a sound long-term footing than burn through the rest of the cash flow and end up in a Chapter 7.

By: J. Strupp

J. Strupp — Tue, 07 Jun 2011 05:39:50 +0000

“If the only thing that is done is a short-term solution, either a “clean” debt-ceiling increase or a massive spending cut that doesn’t affect interest (or a combination thereof), Moody’s is going to join S&P in having a negative outlook on debt.”

Probably one grade down from triple A like S&P, which the debt market will disregard this time too.

But if we play political chicken with the debt ceiling, you can expect MUCH worse from Moody’s, S&P and, most importantly, the sovereign debt market. The irony is that your friends in the GOP might be responsible for creating the very bond vigilanties that they’ve been whining about but currently don’t exist. You might want to keep that in mind since you worry so much about future interest payments on our debt.

We MUCH more to lose than to gain if we decide to play these games.