As per Willem Buiter, Citi Chief Economist piloting the fiscal swamp of America – even if investors don’t tumble down – will not be pretty.
According to what Buiter believes the US defaulting in the midst of an impasse in Washington over lifting the cap on debt ceiling is unlikely, but at the same time he also thinks that the chances of such a conclusion are no longer negligible.
“The inferences of even a procedural US default are likely to be rigorous both for the United States as well as the world economy, involving a large hit to economic growth, a generalized fall in asset prices, and an extensive increase in private and public funding costs” said Buiter in a research note.
The probability of Democrats and Republicans reaching an agreement on a long-term plan so that the US can return to fiscal sustainability is very little, and seeing this, S&P is ultimately to implement its threat of cutting the credit rating of America to a minimum of AA. .
He has written that the repercussions of US relegation are expected to be less severe in comparison to a US default; however they will be significant and involve indirect as well as direct responses, out of which the direct ones would not be much damaging, with neither a major impact from the investors, nor big requirements for investing in AAA-rated securities.
However the ones which are indirect hold more importance.
Buiter also stated the main risks as hikes in US private as well as sovereign funding costs, a blow to generalize and sentiment risk aversion, and increasing doubts regarding the status of dollar as international currency while the US Treasury as a risk free asset.
