Junk Treasuries: Time for US 'Technical Default'

♠ Posted by Emmanuel in , at 6/08/2011 09:35:00 PM
In three simple points, let me explain the concept of subprime globalization before moving on to the enticing prospect of American sovereign debt being junked in 2011:

1. Free money policies have done America next to no good;
2. These free money policies are ultimately costly in adding to the burden of already heavily indebted future American generations;
3. LDCs that should know better are piling public monies better spent on public goods alike health and education into funding wasteful, pointless American spending.

While slagging America is admittedly a pastime in these parts because it is so fun, easy, and morally justified with generous helpings of righteous fury, I am of the mind that the free-spending fool is just that bit less stupid than those footing the bill of the free-spending fool (LDCs purchasing Treasuries).

No matter; we have some very encouraging news that, while not in the realm of immediate probability, still points to the famously tardy credit rating agencies--those same folks whose rating prowess was on display during both the Asian financial crisis and subprime crises--recognizing what the rest of us already know. Yes, American Treasuries are utter rubbish. Following S&P, last week Moody's placed the US under credit watch for a downgrade from AAA status if nothing was done to improve its fiscal picture as soon as July. Now, however, comes news that Fitch will consider a "technical default" by the US as a credit event worthy of dropping the status of Treasuries to junk as soon as August. A technical default simply means that, the US Treasury having exhausted all artifices in avoiding a breach of the $14.3 trillion debt ceiling which has not been raised, fails to honour American obligations.

So, it seems to me that we have two options here. First, we can continue with subprime globalization from which no one benefits--the US and its similarly brainless creditors, or receive a taste of America's bankrupt future via "technical default." I am all for the latter. You can call me a dreamer, but it seems Republican Tea Party folks are not ruling out such a default to (they say) prod the US on a more sustainable fiscal path. See some representative responses [1, 2, 3]--especially to an earlier WSJ interview urging it. Even the Chinese are affecting displeasure at this possibility--I wonder why. Anyway, to this informative Reuters story:
U.S. Treasury bonds, seen worldwide as the risk-free investment [yeah sure], could be labeled "junk" if the government misses debt payments by Aug. 15, credit agency Fitch Ratings warned on Wednesday. The ratings would go back up once the government fulfills its debt obligations, but probably not to the current AAA level, Fitch said on Wednesday in a stark statement about the impact of a short-lived default on U.S. credit-worthiness.

The statement follows similar warnings by Moody's and Standard & Poor's, but Fitch was the first among the big-three rating agencies to say U.S. Treasury securities could be downgraded, even for a short period of time, to a non-investment grade.
Of course, I am fully encouraging the Tea Partiers to pull the trigger (or flush America down the toilet) now since even worse things are in store for their debt-loving country anyway on its present, unsustainable trajectory:
The idea of a brief U.S. default, sometimes called a technical default, has been growing among some members of the Republican Party, who believe it would be an acceptable price to pay if it forces the White House to deal with runaway spending.

"Even a so-called 'technical default' would suggest a crisis of 'governance' from a sovereign credit and rating perspective," Fitch said in a statement...Clearly the political signals which are coming (from Washington) are a source of concern," David Riley, head of sovereign ratings at Fitch, told Reuters in an interview.

Treasury bonds could be rated "junk" by Fitch Ratings if the government misses some $82 billion in debt payments by Aug. 15 due to disagreement over the debt ceiling. The ratings would go back up once the government fulfills its debt obligations but probably not to the current AAA level, Fitch said.

President Barack Obama is trying to win congressional approval to raise the borrowing authority before an Aug. 2 deadline. The Treasury Department said on Wednesday the Fitch warning was "another stark reminder" of the need for Congress to act quickly.
Mark 2 August on your calendar; hopefully, Congress will have done nothing by then:
Fitch said it would first place U.S. ratings on "watch negative" if lawmakers fail to enact an increase in the U.S. debt ceiling by Aug. 2, the date when the Treasury Department will have run out of extraordinary measures to avoid a default.

The first test for U.S. ratings will come two days later when $30 billion in Treasury bills mature. If the government fails to repay them in full, Fitch will lower the rating on those specific securities to B-plus, four notches into junk territory.

But the real deadline comes on Aug. 15 when $27 billion in Treasury notes and $25 billion in coupon payments come due. If the government misses those, Fitch would downgrade the U.S. sovereign issuer ratings to "restricted default" and lower all Treasuries securities to B-plus.

"Though such an event (such as a short-lived Treasury bill default) may not permanently impair the capacity of the U.S. government to service its obligations, it is unlikely that its 'AAA' status would be retained in the short to medium term," it added...Moody's credit rating agency warned last Thursday that it could consider cutting the United States' top-notch credit rating if there was not progress by mid-July on a deal to reduce the deficit and raise the $14.3 trillion U.S. debt limit.
It's time to call a spade a spade. Americans love all sorts of junk: junk food--witness their gut-busting levels of mega-obesity; junk mortgages--witness the subprime fiasco; junk assets (ditto); junk as in making the most garbage--see here...and they'll learn to love junk Treasuries, too. Life is what you make of it, and modern American finances are, well, you can figure that one out. To save the world from subprime globalization, America must literally pay the price for its boorish behaviour.