Markets have started considering US default: price of credit default swap tripled.

The United States is struggling to stand out its fiscal deficit challenges and raise debt limit to continue borrowing. Country is at risk of defaults and probability of that is higher than countries like Indonesia or Slovenia in next 12 months. Also, if we see the cost of credit defaults swap ( cost to insure against defaults ) have risen to almost tripled in last six trading session.

Yet in the past fortnight traders have come to the conclusion that America might breach its own constitutional clause that its debt “shall not be questioned”

America’s dysfunctional politics is starting to infect the markets. To blame are congressmen who, like House Speaker John Boehner, argue it would be less damaging to default than to raise the debt limit without dealing with the deficit. Traders had assumed this was political brinkmanship as usual until Mr Boehner was publicly supported by Stanley Druckenmiller, an eminent former hedge fund manager. He told the Wall Street Journal earlier this month that a few days of missed payments would be worth it to force the White House to accept cuts.

The danger is that a technical default does nothing to bring Democrats round, and there is no sign that Republicans are willing to accept tax rises, also needed if the budget is to balance. Rather than a short sharp political manoeuvre, default could drag on - and become a total disaster.

If a technical default led to a rating downgrade - as it should - it would be catastrophic, forcing rule-driven investors to dump Treasuries and sending yields through the roof.

For now, default worries still seem to be confined to the CDS market. The more congressmen try to make a political virtue out of default, the bigger the danger that fear spills over into the broader bond markets.

It sounds dotty to suggest the US is at imminent risk of default. A country that has rarely been able to borrow so cheaply, that issues debt in its own currency and has just demonstrated that it can print as much money as it likes need never miss a coupon payment.

( Source: Financial Times )
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