Bank Of America Analyst Advocates The "Unthinkable" -- An Intentional Default On US Debt
Joe Weisenthal | Apr. 17, 2011
We continue to be astounded by the emergence of the pro-default meme within financial circles.
Previously it was Chris Whalen and Dean Baker taking the stance that the US could default with minimal negative ramifications.
Now it's someone at a major bank: BofA's credit strategist Jeffrey Rosenberg, whose note from Friday is titled The Case For Default.
He explicitly rejects the doom camp, and thinks temporary default could be managed without significant market interruption.
We don't find his argument to be all that convincing.
No one need create the catastrophic event otherwise feared from a temporary deferral of interest payments on Treasury debt arising out of a political conflict. Politicians on both sides of the debate could help to avoid that outcome by setting market expectations. With appropriate direction from Treasury or Congress, holders of Treasury debt could accrue their missed interest payments while continuing to accrue future interest payments. Though CDS contracts would likely trigger, with relatively limited erosion in bond prices there would be little disruption from the tiny amount of exchanges of cash flows. Treasury can continue to roll over maturing debt into new debt. Would US foreign creditors hold their collective breath under the expectation that the long term benefits of improving fiscal sustainability outweigh the temporary cash flow disruption? And from their authoritarian perspective, would Chinese creditors to the US react stoically to a temporary disruption in their payments if they understand it as a necessary (and temporary) cost under the fractious US democratic system for securing the long term stable purchasing power of $1.1 trillion worth of US promise backed-debt? They might not. But they may face little other choice but to react with calm.
This raises so many questions. How are Congress and the Treasury supposed to give global markets "appropriate direction" about how this will work out? More importantly though, what is this supposed to accomplish? How does this temporary default get the US, with Washington DC so wildly divided, any closer to some long-term budget strategy? This is all incredibly confusing.
Then Rosenberg pivots. The US doesn't actually face any debt risk. Just inflation risk...
One of the murals hanging in Bank of America...