Citi's Buiter: No Longer Negligible Risk of Default

Whigs

From a note from Citi's global economist Willem Buiter:

The extraordinary brinkmanship about the U.S. Federal debt ceiling is being carried to the point that what was no more than a ‘tail risk’ of a selective US sovereign default has morphed into a still small but no longer negligible risk of default. The designations of that eventuality as ‘calamity’ (Chairman Bernanke), ‘Armageddon’ (President Obama), ‘suicide’ (Citi’s Steven Wieting) and ‘insanity’ (former Presidential Adviser Austan Goolsbee) are not an exaggeration. The damage would be so severe, because a default due to a failure to raise the Federal debt ceiling is neither a conventional ‘can’t pay’ default (the country does not have the resources to service the Federal debt in full) nor a conventional ‘won’t pay’ default (when a solvent united government and country “cocks a snook” at its external creditors), but a needless default – we have the resources to honor the debt, we really did not want to default, but we were so busy fighting among ourselves that the deadline passed.

The urgency of the longer-term U.S. fiscal challenge – restoring sustainability to the US public finances – has been increased because of the Federal debt ceiling kerfuffle. Some may find it surprising that any rating agency would rate as AAA a nation with the general government debt and deficit configuration of the U.S., especially given its modest prospective growth rates for real and nominal GDP. There are complex interrelationships between rating agencies and sovereigns, especially the large sovereigns. On the one hand, rating agencies provide ratings for sovereign debt issues and sovereign issuers. On the other hand, sovereigns shape the regulatory and business climate under which rating agencies operate. The dangerous flirtation of the US sovereign with a ‘technical’ default has, however, given the leading rating agencies the courage of their convictions.