Default is unlikely, but there is more at stake
In a recent publication, (Investing through the Washington Mess…) we outlined some of the dynamics at play regarding the ongoing debt limit debate in Washington. Latest developments notwithstanding, it is important to understand two key points:
• A default is very unlikely, and
• If the debt ceiling is not raised, simple prioritization to avoid default by continuing to pay interest would still inflict severe damage on the economy and markets, and could result in a credit rating action
Current revenues are enough to cover U.S. debt interest…
Monthly government revenues are indeed enough to cover interest payments required on outstanding U.S. Treasury Debt.
…but ‘prioritization’ would result in real economic pain.
Prioritizing spending to avoid default is playing with fire; with monthly budget deficits of between 3% and 5% of monthly GDP, a prolonged period of balanced budget operations could deal a heavy blow to the economy.
The U.S. has made strong progress on deficit reduction…
Importantly, the ongoing economic recovery and some spending restraint have resulted in a rapid decline in the U.S. budget deficits. This should provide some encouragement to those who most vehemently oppose raising the debt ceiling.
…and nobody wins politically until a deal is reached.
Politicians are human beings too. And while some members of Congress come from “safe zone” districts that are likely to re-elect them no matter the outcome of the debt dealings, in the end it stands to reason that cooler heads will prevail as Congressional approval ratings have again plunged to record lows.
While the situation is unnerving and certainly unpleasant to watch, a default on U.S. debt seems highly unlikely.
We believe investors are best suited to weather the storm with the support of a sturdy, well-balanced portfolio
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© JPMorgan Chase & Co., October 2013
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