Since mid-January, the United States has reached the legal ceiling for public debt.
The federal government is facing severe technical difficulties in refinancing its obligations, and in a context in which it is not only seeking to refinance but also to increase the stock of debt to finance the fiscal deficit.
MSCI (formerly known as Morgan Stanley Capital International) anticipated that the risk of default in the United States tripled in the last few weeks.
This is known because of the substantial increase in insurance against the cessation of payments that are traded in the market.
These instruments are a type of swap that pays returns when some kind of risk is expected to be hedged, something very popularized by some investors such as Michael Burry and popularly represented in the movie “The Big Bet” about the 2008 crisis.
Many investors jumped into buying these instruments, anticipating that US Treasury securities would fully or partially default and, thus, make a profit on the return associated with this catastrophic event that could occur.
The implied probability of default increased from 3.3% in January to 11.3% in the first three days of March, as confirmed by the latest MSCI report.
This is the first time these values have been observed since 2013 when the country was going through a similar default discussion.
“While the rise in CDS spreads on US government debt has been rapid and massive, it is not without precedent, as CDS spreads are approaching levels similar to those seen during the debt ceiling debates of 2011 and 2013. During those battles, Congress reached an agreement at the last minute to avoid a default,” the financial firm explained.
President Joe Biden is still reluctant to produce a deal with the opposition Republican Party to lift the debt ceiling.
The opposition demands an adjustment in public spending consistent with public finance order, but the Democratic administration’s agenda points the opposite direction.
The federal government’s financial and fiscal deficit climbed to 6% of GDP in January 2023, the highest in 10 months, and the primary red rose sharply after the irresponsible student loan bailout.
“Such a default could cripple the economy and lead to extreme interest rate volatility, as much of the world’s interest rate levels are partly influenced by the ‘risk-free’ nature of US government debt,” the MSCI report warned.
With information from Derecha Diario