The Senate passed a stopgap measure last night to fund the government until around December 3. Did this improve or worsen the US credit profile? In my opinion, it made things worse.
Sure, the agreement averted an imminent default on Oct. 18. But...
- It is obvious that the US government and political system is in deep trouble. Things should never have reached this point of funding the country on a day-to-day basis, not for a AAA/AA+ rated sovereign, anyway.
- The debt limit process has to start anew and conclude in 6-7 weeks. The can was just kicked down the street a few feet (meters), the serious problem remains.
- The stakes have been raised by the Republicans, who will now demand complete "surrender" on the Biden plan to spend $3.5 trillion.
- The stakes have also been raised by the "progressive" faction of the Democrats who will accept nothing less than the $3.5 trillion.
- Therefore, the probability of total political gridlock going forward is now higher than before.
- Therefore, the risk of default - small though it may be - is higher today than yesterday.
- Markets seem to agree: US sovereign Credit Default Swaps rose to 17.4, the highest level in one year, and the country dropped further to number 12 as a credit risk.
- The US is now almost twice as likely to default as Germany (0.29% vs 0.15%)
I will repeat my point of several posts ago: the US CDS are mispriced and we should now be using Germany as a benchmark for their proper calculation. Following the methodology of my post produces a theoretical US CDS price of 134. That's a level almost 8 times higher than now.
And, I will say it again: it is the "unthinkable" that we must worry about and protect against.
No comments:
Post a Comment