World Market News

[Showqi]

Tea party debt plan takes center stage

Tea party debt plan takes center stage as clock ticks on default

 

 

WASHINGTON (AP) -- The next step in the weeks-long saga over how to increase the government's borrowing cap is to let House tea party forces try it their way.

A Republican "cut, cap and balance" plan set for a House vote Tuesday would condition a $2.4 trillion increase in the so-called debt limit on an immediate $100 billion-plus cut from next year's budget and adoption by Congress of a constitutional amendment to require a balanced budget.

 

"Let's let the American people decide," said Rep. Jim Jordan, R-Ohio, on "Fox News Sunday." "Do they want something common sense as cutting spending, capping the growth in government and requiring a balanced budget amendment to the Constitution?"

 

The idea appears to be to allow tea party-backed GOP lawmakers to have the run of Congress this week in hopes that they'll ultimately be able to stomach a plan emerging in the Senate to give President Barack Obama sweeping power to order a $2.5 trillion increase in the debt limit without approval by Congress.

 

The cut, cap and balance plan, however, is a dead letter with Obama and in the Democratic-controlled Senate -- as is a separate effort by Republicans in that chamber to adopt a balanced budget amendment. Amending the Constitution requires a 2/3rds vote of both Houses, including 67 votes in the Senate, where Republicans control just 47.

 

"No one believes there are 67 votes for any version of that," said Dick Durbin of Illinois, the No. 2 Senate Democrat, on CBS' "Face The Nation."

 

Public opinion polls show that voters like the idea of a balanced budget, but the government faces such massive budget gaps -- it now borrows more than 40 cents of every dollar it spends -- that the cuts required to eliminate the deficit were too draconian for even the GOP-dominated House to endorse balancing the budget anytime soon. The House Republican budget still leaves deficits in the $400 billion range after 10 years.

 

The immediate issue is allowing the government to continue to borrow from investors and foreign countries like China to pay its bills -- which include a $23 billion batch of Social Security checks set to go out the day after an Aug. 2 deadline to avoid default.

 

With the deadline just over two weeks away and with a recent round of White House talks failing to generate a breakthrough, Sen. Mitch McConnell, R-Ky., the cagey leader of his party in the Senate, has proposed a plan that would allow Obama to automatically win a large enough increase in the debt to keep the government afloat until 2013 unless both House and Senate override him by veto-proof margins.

 

McConnell's plan has political advantages but has come under assault from many conservatives eager to take advantage of the current opportunity to use the need to lift the debt ceiling to force deficit cuts now. But Republicans refuse to consider any tax revenue increases demanded by Obama and Democrats to balance any budget package, and Democrats won't go along with significant cuts to benefits programs like Medicare and Medicaid unless tax increases on the wealthy are a part of the package.

 

"It's not fair to ask senior citizens to pay a price, to ask families paying for their college educations, for their children to pay a price, but to leave the most privileged out of the bargain," said Jacob Lew, the White House budget director, on ABC's "This Week." "Everything has to be on the table."

 

That leaves lawmakers well short of the $2 trillion-plus in deficit cuts required to offset a debt increase that's big enough to solve the problem through next year's elections. A sense of futility has pervaded White House talks since Boehner abandoned hopes for a "grand bargain" with Obama a week ago Saturday, prompting McConnell to come out with his plan. Majority Leader Harry Reid, D-Nev., is on board but wants to add a plan to create yet another deficit panel, comprised entirely of lawmakers and evenly divided between the two parties, that would try to break the deadlock by the end of the year.

 

It's also expected that a package of spending cuts, perhaps in the $1.5 trillion range over the coming decade, would be attached to the McConnell-Reid measure, perhaps in the House.

 

For now, House Speaker John Boehner, R-Ohio, is standing behind his tea partiers. But he seems open to the McConnell idea.

 

"The cut, cap and balance plan that the House will vote on next week is a solid plan for moving forward," Boehner told reporters Friday. "Let's get through that vote, and then we'll make decisions about what will come after."

 

For its part, the White House continues to press in public for a large-scale bargain. But it's obviously open to the McConnell plan.

 

"There's multiple tracks that are being discussed," Lew said. "It's not a given how we get to raising the debt limit."

 

http://finance.yahoo.com/news/Tea-party-debt-plan-takes-apf-4233148026.html?x=0&sec=topStories&pos=1&asset=&ccode=

[Showqi]

Public opinion polls show that voters like the idea of a balanced budget,

but the government faces such massive budget gaps -- it now borrows more than 40 cents of every dollar it spends

-- that the cuts required to eliminate the deficit were too draconian for even the GOP-dominated House to endorse balancing the budget anytime soon. The House Republican budget still leaves deficits in the $400 billion range after 10 years.

The house of cards ready to collapse!

[Showqi]

Who Will Suffer if There's No Debt-Ceiling Deal

 

Are they bluffing? Or could Washington politicians really torpedo the economy by refusing to raise the nation's borrowing limit?

 

The conventional wisdom is that the debt-ceiling drama is mostly political posturing. Once they've made their point, the thinking goes, Republicans and Democrats arguing over how to rein in out-of-control government spending would reach some kind of agreement, raise the federal debt ceiling, and allow the government to keep functioning normally. But businesses and investors are starting to worry. The government will max out its borrowing ability in early August, and will have to dramatically cut spending if it's not allowed to borrow more. Taxes and other revenue only cover about 60 percent of what the government spends. It borrows--by issuing Treasury securities--to finance the other 40 percent or so. Economists are now running the numbers and trying to predict what will happen if the debt impasse continues and Washington has to stop borrowing. This is not work for the squeamish.

 

There's a lot of talk about the government defaulting on its debt, but that's not likely to happen. The government collects about $200 billion per month in taxes and other revenue, and that cash would keep coming in. It borrows another $130 billion or so each month--the money it would have to live without. Interest payments on the nation's debt--which Washington must pay on time to avoid being in default--amount to about $30 billion per month. If forced to choose, the government would almost certainly prioritize debt payments above other obligations, because welching on bonds considered the world's safest would sink financial markets everywhere and make American the world's biggest deadbeat. And the Treasury Dept. would still have adequate cash flow to cover debt payments and remain in good standing with borrowers.

 

Almost everything else the government pays for, however, would be vulnerable to sudden cutbacks. Here's who would feel the pain most abruptly:

 

Social Security recipients. The government is due to deliver $23 billion in Social Security payments on August 3, according to forecasting firm IHS Global Insight. If the government is forced to cut 40 percent of its spending, these Social Security checks may not arrive. The suddenness with which the political battle in Washington will hit the wallets of ordinary Americans is one reason many analysts assume that a true impasse over the borrowing limit will be short-lived. But it could still be damaging. Social Security recipients who depend on their checks to pay other bills could end up running behind, incurring costly late fees or damaging their own credit. And it's no guarantee that if stopped, the government's check-writing machinery will start up again without delays or snafus that hold up checks even longer.

 

Government employees. Another likely outcome is the shutdown of government offices and the furlough of federal employees. Everyone loves to bash government bureaucrats, but they're a meaningful chunk of the U.S. economy, amounting to 4.4 million workers, including the uniformed military. Many of them will stop getting paychecks, which at a minimum will slow spending and weaken the economy further. That would probably mean the closure of national parks, passport offices, veterans' facilities and many other government offices. Amtrak and the U.S. Postal Service could be affected. The government would probably fence off the military and certain vital services, but even soldiers could be affected if the debt battle drags on.

 

The unemployed. Washington currently offers extended unemployment benefits to nearly four million people who have exhausted state-level benefits, which last for 26 weeks in most states. Those checks could stop coming, too. One reason unemployment benefits are important is that recipients spend virtually all of the money, providing an immediate boost to the economy. A tighter crunch on the unemployed could also lead to more foreclosures and defaults on other types of consumer debt, since something will have to give if those checks stop arriving.

 

Investors. Nobody's sure exactly how a sharp cut in federal spending would affect stock and commodity markets--except it would be bad. Federal Reserve Chairman Ben Bernanke told Congress recently that a borrowing moratorium would generate "shock waves through the entire financial system." The U.S. government is the world's biggest spender, and the flow of money from Washington impacts virtually every financial market in the world, through checks sent to thousands of vendors and contractors, the rates paid on Treasury securities, and decisions made by the Federal Reserve. It's almost impossible to predict the daisy chain of events that would unfold as global investors reacted to the sudden upending of the world's financial order.

 

But a few general outcomes seem likely. First, a borrowing moratorium of more than a few days might be enough to tip the U.S. and even the global economy into a recession, so banks, employers and foreign governments would suddenly adjust their own spending and prepare for tough times. "Risk" assets like stocks would plunge in value, with safer assets like gold soaring. Investors may flee dollar-denominated assets and search for other safe-haven currencies, though it's hard to tell which ones, since the euro and yen aren't exactly appealing. Some economists worry about a "TARP moment" similar to Sept. 29, 2008, when Congress first voted down the massive bank bailout bill--and the stock market fell about nine percent in a single session. Even if the debt ceiling were lifted after a few days of pandemonium, there could still be lasting damage. "There would be massive dislocation in financial markets, because the recipients of government spending that fail to get priority, and do not get paid, will be unable in turn to meet their own obligations," says economist Nigel Gault of IHS. "Confidence in the ability of the U.S. government to fulfill its most basic responsibilities would be damaged."

 

Borrowers. Interest rates would go up, but not necessarily soar. U.S. Treasury securities are a baseline investment that anchor the value of many other types of loans, and a sudden risk of default by the Treasury would change that calculus completely. Rates on Treasuries would go higher, to compensate for the increased risk. Many other interest rates would rise in tandem. But other factors would probably keep rates from rising to usurious levels. The Fed would probably act to counter fears of a recession. A recession itself, if one occurred, would weaken demand for credit, which usually pushes rates down. And investors would bid on bonds while expecting an eventual solution from Washington, which means a rate hike could be temporary. Even that, however, could play havoc with global portfolios.

 

The government itself. Any moved that weakened the economy and threw more people out of work--or simply impeded hiring--would further reduce the government's tax revenues and make the U.S. debt problem worse.

 

Art lovers, beachgoers, and public TV viewers. A long list of "discretionary" federal programs has been targeted for cuts or elimination, and those could end up getting whacked right away. These tend to be low-visibility programs that don't cost all that much--compared to huge budget items like Medicare or military spending--but fund nice-to-have things that many people would miss if they disappeared. Earlier this year, House Republicans outlined dozens of cuts they'd like to see in things like the National Endowment for the Arts, the National Endowment for the Humanities, the Corporation for Public Broadcasting, beach replenishment, grants for intercity rail service, regional development agencies, and local transit.

 

If cut, those programs could see funding restored once the crisis passes. But if the big spending cuts happen, Americans will notice that a lot of things they don't necessarily associate with Washington are suddenly unavailable. The federal government is big, indeed. We may be about to find out just how big.

 

http://finance.yahoo.com/news/Who-Will-Suffer-if-Theres-No-usnews-1162833064.html?x=0&.v=1

[N.O.R.F]

Interresting times.

 

Moody's and S&P to down grade the US' coveted AAA rating? That would cause shock waves.

 

Everyone is watching this. Markets are down world wide.

[Abu-Salman]

Well, even The Economist was lamenting the GOP slashing of poor pregnant mothers supplementary nutrition, the already woefully inadequate medicare and other most basic provisions to the poors (mostly minorities); what is most ironical is that these should be exactely the programs that have the biggest multiplier effect on every invested dollar in this recession for the long haul, not to mention their incalculable long-term or indirect benefits.

 

When you have ideology ("No tax" marketing, even when the richest have accumulated tax breaks until recently) combined to greed gone mad (corporations are making record profits to the tune of 2 trillions), no wonder income inequality and social breakdown are rising out of the control while long-term investments on infrastructure or education is absent (infrastructures around the USA are derelict , barely maintained, with long-term competitivity in question)...

[OdaySomali]

Germany is playing hardball with Greece and the markets

 

As it has become clear to everyone that even after last year's €110bn (£96bn) bail-out, Greece cannot sustain its debt burden, the big question is who should foot the bill.

 

 

Germany, the eurozone's powerhouse economy and its unwilling paymaster, has been insistent that member states – ultimately, their taxpayers – should not bear the brunt alone.

 

 

Berlin has been pushing for the private sector, which took the risk in lending to the Greek and other governments, to take a loss, or "haircut", on the government bonds it holds.

 

 

The problem around any plans to restructure the Greek debt is how to do so without action being classed by the credit rating agencies as a default, which would trigger payouts on credit default swaps – insurance contracts – and, potentially, a fresh wave of alarm in the markets. A French proposal for bondholders to "roll over" their Greek debt holdings when they were due to collect, instead taking up fresh long-term debt, was among the options which ran into rating agency objections.

 

Crucially, the European Central Bank has ranged itself against anything that might look like a default. Despite these difficulties, a banking levy proposal – taxing eurozone banks to help fund Greece – which emerged in a leaked paper on Tuesday was seen by some as a way of piling pressure on the private sector to agree on some form of involvement.

 

 

Talks on the matter, led by the International Institute of Finance, a banking lobby, are taking place in Rome. "'If you don't come up with anything we can live with, we will impose a tax', is the threat," a banking source said. #

 

Certainly Angela Merkel, the German Chancellor, has not been striking a conciliatory tone. On Sunday, she indicated she would not turn up at the Thursday summit unless a deal was in place, raising suspicions she is playing hardball. On Tuesday, she was busy pouring water on market expectations for a "spectacular" result on Thursday.

 

Her reluctance to back down, given the political backlash she would face at home, is understandable – but less than reassuring for markets.

 

Source: The Telegraph

[OdaySomali]

Eurozone debt crisis could prove 'very costly' for the world, warns IMF

 

The International Monetary Fund (IMF) has urged eurozone leaders to take immediate action over the region's debt crisis, warning it could prove "very costly" for the world.

 

 

 

Europe's policymakers must press on with deeper economic integration to "stay the course", the global lender said ahead of Thursday's crunch summit of eurozone leaders.

 

 

"To put the crisis behind, we need more Europe, not less. And we need it now," said Antonio Borges, director of the IMF's European department, as it released its assessment of the turmoil.

 

 

On Tuesday night, diplomats in Brussels were warning of "bedlam" unless a deal is "more or less" sealed on Thursday.

 

The crisis around Greek debt now poses "serious risks" that it will infect the region's core powerhouse economies, such as Greece [lol MUST BE A TYPO] and France, even if officials pursue a strategy aimed at avoiding a default by Athens, the IMF said.

 

 

The fears about weaker member states' finances have already sent their borrowing costs sky-high, necessitating bail-outs for Greece, Ireland and Portugal.

 

If the crisis were to spread to the core euro area, this could have "major global consequences", the IMF said. "Decisive further policy actions to contain the crisis are critical not only for the euro area itself, but also from a global perspective."

 

However, politicians and the public were said to be "reluctant to renew their vows" to the European project.

The warning appeared to be borne out as Angela Merkel, the German Chancellor, on Tuesday said markets should not expect Thursday's summit to offer a silver bullet solution to the eurozone's debt crisis.

 

"There are other necessary steps to take and not one spectacular result that will solve all problems," she said.

With all painfully aware that Greece is in need of a second rescue package, Germany and the European Central Bank (ECB) are opposed over how the private sector – investors such as banks and insurers – should share the pain.

 

Berlin wants the private sector bondholders to take a hit in some form, but no one is clear how to achieve this without the credit rating agencies classing it as a Greek debt default, with potentially dangerous consequences for the financial system.

 

The ECB has been vehemently opposed to anything that looks like a default, warning it would no longer accept Greek government bonds as collateral for its lending – which would plunge the Greek banking system into chaos.

 

A paper obtained by Reuters on Tuesday proposed a bank levy – taxing the eurozone's banks to help fund Greece – as a means of involving the private sector without it being classed as a default.

 

The plan appeared to be winning support, although bank sources suggested the proposal was a means of turning the screw on them in order to encourage some sort of "voluntary" restructuring of the Greek debt they hold.

 

However, there are concerns that this plan would not offer the one-size-fits-all solution necessary to calm markets.

 

http://www.telegraph.co.uk/finance/financialcrisis/8648677/Eurozone-debt-crisis-could-prove-very-costly-for-the-world-warns-IMF.html

[OdaySomali]

Risk of stock market crash is building, warns Centre for Economics and Business Research

 

Veteran forecaster Douglas McWilliams said: "The signals seem to be building up for some kind of market crash – shares and many bonds are already down significantly from their recent peaks. At the beginning of this year we gave one-in-five odds on a UK double-dip. The chances now are about one-in-three."

 

 

The FTSE has dropped sharply from a peak of more than 6,000 in early July; while the price of Greek and Italian bonds has fallen off a cliff, as investors prepare for a possible default.

 

 

Angus Campbell, head of sales at spread-betting company Capital Spreads, said: "Sentiment is pretty beaten up; the indices continue to chop and change between highs and lows. It's impossible to make a rational decision over where to invest your money when such huge macro issues are dominating proceedings."

 

 

Mr McWilliams berated US and European politicians for treating their deficits as political bargaining chips. There are few options left open to them to avert a crash, he said. "The real fear is that the main economic weapons were used up to deal with the last crisis. There is no scope for reducing interest rates and printing money is regarded with scepticism, though it may yet prove the only option."

 

 

Analysts fear a global meltdown if there is no positive outcome form the emergency European summit on Thursday. Mick Gilligan, partner Killik & Co, said: "If there isn't some sort of positive result out of Europe, it could be quite a choppy summer. If politicians have gone away for the break, the markets aren't going to wait around."

 

 

Deutsche Bank analysts said last week that global stocks could plunge as much as 35pc if the crisis spirals.

 

Falls would be exacerbated by weak trading during the summer, and even the Test Match this Thursday, said Mr McWilliams. "There is a history of crises starting in August like the 2007 financial crisis and the 1998 Russian default, not to mention the most famous August crisis which became the First World War."

 

He joins a growing chorus of voices forecasting a double-dip. A recent Deloitte survey showed that one-in-three finance directors of FTSE 100 and FTSE 250 companies believes the UK economy will fall back into recession.

 

Mr McWilliams finished by taking a potshot at David Cameron. He said the Prime Minister might take advantage of the crisis to renegotiate the UK's links with Europe, which could bring down the Coalition and force an early election. "A lot could happen in the next few weeks," he concluded.

 

http://www.telegraph.co.uk/finance/financialcrisis/8648310/Risk-of-stock-market-crash-is-building-warns-Centre-for-Economics-and-Business-Research.html

[Valenteenah.]

There's a lot of speculation in Deutschland that the Euro-zone crisis will get a lot worse and might even lead to the break-up of the EU. Perhaps Germany and France should shed the dead weight of the weaker and stagnant economies before matters get too dire??

 

Bet Turkey is thanking God for a lucky escape!

[OdaySomali]

Either this will lead to the closer integration of the E.U or the disintegration. The crisis in Europe is far more profound than the 'crises' in the U.S which, imo, will be resolved [even if on the 11th hour]. It will be very interesting to see how this all goes. I am not looking forward tot he prospect of yet another recession though.

 

---

 

[OdaySomali]

Anyone watching Sarkozy's, Merkel's press conference about the Eurozone debt crisis. [bBC news channel live] ?

[Valenteenah.]

Caught the Q&A on CNN. It's all gobbledygook. Packaging and repackaging billions of debt and then lending and relending it.

[Showqi]

Rival debt plans pushed as deadline looms

 

WASHINGTON (Reuters) - Top lawmakers rolled out dueling debt plans on Monday that offered little prospect for compromise, increasing the threat of a ratings downgrade and national default, as President Barack Obama prepared to address Americans on the impasse.

 

Little more than a week before the August 2 deadline to raise the $14.3 trillion U.S. debt ceiling, Republican and Democratic leaders traded blame in an acrimonious standoff as they pursued separate budget proposals, with no clear path to bring them together.

 

The stalemate rattled investors worldwide, sending stocks and the dollar down and pushing gold to a record high, but falling far short of the panicky sell-off that some politicians in Washington had feared after weekend talks broke down.

 

Raising the stakes and seeking to seize back control of the debate, the White House said Obama would address the nation at 9 p.m. EDT (0100 GMT) about "avoiding default and the best approach to cutting deficits."

 

House of Representatives Republicans unveiled details of a two-stage deficit reduction plan that would start with an initial $1.2 trillion in savings over 10 years. It is sure to be rejected by Obama because it would raise the debt limit for only a few months, meaning the issue would have to be revisited early next year.

 

Obama's Democrats formally presented their competing plan for $2.7 trillion in deficit reduction over the next decade but with a debt limit increase that would carry through the November 2012 elections, when Obama and many lawmakers are up for re-election.

 

Republicans control the House and Democrats control the Senate.

 

Republican House Speaker John Boehner dismissed the Democratic plan as "full of gimmicks." Senate Democratic Leader Harry Reid insisted "extremists" within the Republican Party must not be allowed to dictate the outcome of the debt and deficits debate.

 

Neither plan may be enough to avert a downgrade by ratings agency S&P, which has indicated it wants to see a $4 trillion deficit reduction plan over 10 years. Critics said both sides appeared more interested in scoring political points than forging compromise as the 2012 campaign gathers steam.

 

With markets increasingly focused more on the risk of a damaging cut in U.S. Treasury bonds than on the prospects for an unprecedented federal default, the stage was set for growing investor alarm if the stalemate goes down to the wire.

 

 

CHORUS OF GLOBAL CONCERN

 

 

Joining a growing chorus of global concern as the world's largest economy showed signs of legislative dysfunction, the International Monetary Fund urged swift U.S. action on its debt to avert broad negative fallout.

 

Obama and congressional leaders have tried to reassure global markets that the country will be able to service its debt and meet other obligations after August 2, when the United States will run out of money to pay all of its bills.

 

Boehner's plan would raise the debt limit in stages, forcing Congress to confront the politically painful issue again before the November 2012 election, when Obama is seeking a second term.

 

Boehner will push for legislation to cut $1.2 trillion in spending over 10 years and provide a short-term, $1 trillion increase in the government's borrowing limit but include no tax increases. Obama has said he opposes a short-term debt limit hike and instead wants about $2.4 trillion in new borrowing authority, which would extend through 2012.

 

"It would be irresponsible for the president to veto this legislation," Boehner told reporters.

 

Reid laid out a $2.7 trillion spending-cut plan that includes savings from domestic and defense programs and would provide borrowing authority to meet needs through 2012. It would include $1.2 trillion in savings that Democrats say Republicans already had agreed to.

 

The White House quickly endorsed Reid's approach and told the Republicans the "the ball is in their court."

 

Secretary of State Hillary Clinton sought to reassure Asia, which holds close to $3 trillion in U.S. government debt, that the United States would reach a deal and avoid default.

 

"I'm confident that Congress will do the right thing and secure a deal on the debt ceiling and work with President Obama to take the steps necessary to improve our long-term fiscal outlook," she said in a speech in Hong Kong.

 

http://finance.yahoo.com/news/Rival-debt-plans-pushed-as-rb-3319492298.html?x=0&sec=topStories&pos=1&asset=&ccode=

[Showqi]

U.S. Credit Swap Trading Soars 80% as Deadline Nears

Bloomberg

 

Trading of credit-default swaps insuring U.S. Treasuries soared almost 80 percent as the deadline nears for plans to cut the nation’s budget deficit and raise the $14.3 trillion debt limit to avoid default.

 

 

Traders bought and sold 41 contracts in the week through July 22, insuring a daily average of $250 million of U.S. debt, up from $140 million during the past month, according to the Depository Trust & Clearing Corp. The country was the tenth most traded among the 1,000 entities tracked by DTCC, with 1,063 outstanding trades covering $4.9 billion of debt -- a third of the total on German bunds.

 

 

Failure by President Barack Obama and congressional leaders to reach a debt agreement may force the government to delay bond payments, causing a credit event that would trigger insurance payouts. The parties are struggling to reach a compromise before Aug. 2, the date Treasury Secretary Timothy F. Geithner said the government will run out of options.

 

 

“While investors remain hopeful that the debt ceiling will be raised prior to Aug. 2, it is still unclear if such a move will be accompanied by a deficit reduction package that will be large enough to placate the ratings agencies,” Barclays Capital strategists led by Bradley Rogoff in New York wrote in a note to investors.

 

 

Treasury Yields

 

 

For all the concern about a default, yields on the benchmark 10-year Treasury note are about 3 percent, below the average of 4.05 percent over the last decade and less than the average of 5.48 percent when the U.S. was running budget surpluses between 1998 and 2001.

 

The U.S. determinations committee of the International Swaps & Derivatives Association may call a failure-to-pay credit event after a three-day grace period, said David Geen, general counsel for ISDA. The industry group sets standards in the swaps market and runs the committee of dealers and investors that determine when payouts are made.

 

A technical default would allow swap buyers to be compensated even if the debt commitments are eventually honored.

 

 

“For CDS, if it triggers it triggers,” London-based Geen said in an interview today. “If they fail to make a payment and the grace period passes, even if they cure it the next day, it still triggers.”

 

 

Debt Auction

 

 

That would cause an auction to settle swaps based on the value of the cheapest securities available. While U.S. Treasury debt typically trades at or above par, some longer-dated bonds are quoted below face value.

 

 

The government’s $25.9 billion of bonds due in February 2039 traded at 87 percent of face value, meaning swaps buyers would be paid 13 percent to settle the contracts.

 

 

“Even under a scenario of failure to raise the debt ceiling, we view default a lower likelihood outcome relative to payment prioritization,” Jeffrey Rosenberg, a credit strategist at Bank of America Merrill Lynch in New York, wrote in a note to investors. “Such an outcome however implies a government shutdown and the negative economic consequences of this would weigh negatively on credit spreads, albeit less than that under the dire version of the ‘default’ scenario.”

 

 

While credit swaps signal less than a 2 percent chance the government will default within the next year, the insurance contracts are the most expensive they’ve ever been. Swaps insuring Treasuries for one year cost a record 80 basis points yesterday, according to CMA, up from 46 basis points last week and 23 at the start of the year.

 

 

One-year contracts surpassed longer-term insurance for the first time this week and are now more expensive than Saudi Arabia, Belgium, Turkey and Thailand, CMA prices show.

 

 

Five-Year Swaps

 

 

Five-years contracts are trading at 63.5 basis points, the highest level since March 2009, and signal a 5 percent chance of default within that time, according to CMA. That compares with 37 basis points in April and a record 100 basis points at the peak of the financial crisis in 2009.

 

 

Swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements.

 

 

“If CDS is triggered, you’d get paid out but then your protection is gone,” ISDA’s Geen said. “Your protection would effectively be knocked out and settled and if you had to re- hedge, it could cost more.”

 

 

Notional Value

 

 

Swaps on U.S. debt are relatively new, having only been tracked by CMA since 2007, when they cost less than 10 basis points a year. Trading is still low compared with outstanding securities. While the notional value of protection has increased 57 percent this year, the amount is only 0.05 percent of total marketable U.S. public debt.

 

 

Swaps on the U.S. also cover a fraction of contracts on European governments. Italy has $25 billion of swaps outstanding, the most in the world, followed by France with $21 billion and Spain with $18 billion. Swaps on Germany cover $16.5 billion and the U.K.’s protect $12.3 billion.

 

 

“I always thought buying CDS protection on the U.S. was a complete waste of money because if the U.S. defaulted, you’d never find a counterparty who would pay you,” said Gary Jenkins, head of fixed income at Evolution Securities in London. “However I was wrong, because this is the one scenario where you should definitely be paid out.”

 

 

http://finance.yahoo.com/news/US-Credit-Swap-Trading-Soars-bloomberg-2462477248.html?x=0&sec=topStories&pos=4&asset=&ccode=