Goldman Sachs: Debt default is “extremely unlikely”

July 11, 2011

Here is what President Obama said this morning:

As all of you know, I met with congressional leaders yesterday. We’re going to be meeting again today, and we’re going to meet every single day until we get this thing resolved.

The good news is that all the leaders continue to believe, rightly, that it is not acceptable for us not to raise the debt ceiling and to allow the U.S. government to default. We cannot threaten the United States’ full faith and credit for the first time in our history.

But markets don’t seem concerned. Interest rates remain at rock-bottom levels. Why? Investors know the financial and budgetary math makes a default the longest of long shots. Here is a bit from a research note just out from Goldman Sachs (bold is mine):

There are essentially two plausible outcomes. One is that the two sides agree on a deal in coming weeks, with headline cuts of $2+ trillion over a 10-year horizon, probably mostly composed of discretionary spending caps that gradually squeeze projected outlays in a highly back-end loaded fashion. The other outcome – whose probability has unfortunately risen in recent weeks – is that there is no deal by August 2. Even in this case, we continue to believe a default is extremely unlikely, as the Treasury would likely prioritize interest payments, Social Security and Medicare payments, and “essential” defense payments over other types of spending, and should have enough revenues to cover the essentials. But make no mistake: the negative consequences of failing to make other payments would be very severe. In the month of August, projected outflows exceed projected inflows by about $150bn (not annualized), or about 12% of GDP. Even if we allow for a further decline in cash holdings in the Treasury’s account with the Fed, this means that a failure to reach a deal would imply a huge, immediate fiscal retrenchment. The economic consequences of such a retrenchment would likely force a deal within a few days.

Again, the issue is a government shutdown, not a default.

One comment

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[...] think he is lying, especially in light of what I know as well as what Goldman Sachs recently said, courtesy of Jim Pethokoukis: There are essentially two plausible outcomes. One is that the two sides agree on a deal in coming [...]

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[...] unlikely,” even if the debt ceiling isn’t lifted, Jim Pethokoukis at Reuters reports. Here’s the money [...]

“the Treasury would likely prioritize interest payments, Social Security and Medicare payments, and “essential” defense payments over other types of spending, and should have enough revenues to cover the essentials. But make no mistake: the negative consequences of failing to make other payments would be very severe.”

Yes, I’m sure making the government prioritize spending and quit spending 150% of revenue every month is “severe” to government officials.

It’s like taking a crack pipe away form an addict… let me tell you he’s convinced he’ll die if you do that, it’ll be the worst thing ever… and just give him back his pipe.

Some important questions to consider:

Do you think the government can keeps spending 150% of it’s revenue forever without prioritizing spending?

Do you think that the government will really make meaningful steps to reduce spending and stop the continued waste?

Do you think prioritizing your spending and reducing it to your income when you’re in dire financial straits is a bad thing?

I don’t see which of these is even a negative, much less something we shouldn’t consider letting happen… they all look like pretty good things to be doing to me.

Posted by ertdfg | Report as abusive

[...] We’re going to be meeting again today, and we’re going to meet every single… James Pethokoukis Tags: debt, default, Goldman, Sachs, unlikely”, [...]

[...] that current Social Security recipients will continue receiving checks beyond August 2nd – regardless of whether the debt ceiling is raised or not. He could prioritize entitlement checks over any number of non-essential outlays. Instead, he is [...]

[...] that Republicans “refuse to believe a default is imminent” neglecting to note that others also argue that a failure to raise the ceiling by August 2 need not result in [...]

[...] that Republicans “refuse to believe a default is imminent” neglecting to note that others also argue that a failure to raise the ceiling by August 2 need not result in [...]

[...] that Republicans “refuse to believe a default is imminent” neglecting to note that others also argue that a failure to raise the ceiling by August 2 need not result in [...]