Personally, I really can't see a way that the 2 sides can agree to either the budget or the debt ceiling, but no doubt at some point they will. In the meantime there is the very real possibility that the US will default on some securities. Because treasuries apparently don't contain cross-default wording (most bond issuers have what is termed cross-default clauses. This basically means that if they default on one bond, they default on all - a strong incentive to not miss any coupon payments or maturities. The US government apparently doesn't have this. Maybe investors should insist on it in the future?) there will then be some defaulted US government bonds, and some non-defaulted - until they mature or a coupon is due anyway.
This will clearly cause havoc - especially in the repo market, where few banks or clearers have systems that are designed to allow differentiation between defaulted and non-defaulted US securities. As a result i imagine many will simply refuse to take any treasuries as collateral. Clearly very bad news, and many are saying this is another Lehman moment which will tip the world back into financial chaos.
I'm afraid I don't agree. The Lehman problem was in large part caused by its sudden and unexpected nature. No-one had planned for Lehman to actually disappear over that weekend. I had a bbq with a friend who worked for Lehman that weekend and we were laughing about him working for BofA, Merrill or Barclays on Monday, but none of us thought the company would disappear.
The difference this time is everyone can see it coming, and has had weeks, or even months if they had their eyes open, to get themselves sorted out. Yes there will be ructions, but most players will by now have contingency plans in place, and probably already in full swing. Other collateral than treasuries will be pledged in repo, investors are already shying away from short-dates treasuries. For the most part it will be a huge inconvenience, not a disaster.
I hope I'm right.
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