The Worst Thing that May Happen is a Technical Default

The US will reach the current upper limit of borrowings ($16.7 trillion) by October 17.
If the Congress fails to agree on the new limit of the state debt, the US may face for the first time in history a sovereign default. In return for support of a higher ceiling of the state debt, the Republicans insist on cutting of the expenditures on federal social programs, including the medical insurance program developed by the Democrats.

The problem of the state debt is not a new one for the US as the Congress and the White House often confront each other on that issue. In our view, the flow of the state debt will be definitely increased. The worst thing that may happen is a technical default: if prior to October 17 they fail to reach an agreement, debt payments will be frozen for a week. The technical default is not a default as such; it is only a postponement of the terms of payments.


For the US, 100%-120% of the internal state debt is an affordable amount and it affects in no way the stability of the US financial system, the more so, both the inflation rate and returns on treasury bonds are at the very low level. Suffice to say that in the US mortgage interest rates for the term of 30 years amount to 3.2%-2.5%.


The main creditors of the US - China and Japan - are concerned about that situation, but they are actually self-confident because returns on US treasury bonds remains low and no large-scale bond sales are observed on the market. It gives reason to believe that the situation remains under control.


In a few weeks the situation will return back to normal, while in case a positive decision has been reached before October 17 included a rally on the US stock market is likely to be observed.


There are no grounds to believe that President Obama will sacrifice the Medicare program. The US President sets a high value on it as that program was the main point in his re-election campaign for the second term and, in addition to the above, the program is very popular among US citizens. Medicare can be attributed to protected items, so it will be funded in full in any circumstances.


А.L. Vedev, Director of the Structural Research Center