The biggest risk facing the market right now is the prospect of a US debt default, which could arise as a result of Congress not lifting the debt ceiling.
The US is due to hit the debt ceiling in just a few weeks, and then the Treasury would have various “maneuvers” to keep the US from defaulting. Supposedly that would buy the government a few more weeks.
It’s not all that likely, but it’s not zero. What’s amazing is how blase the market seems to be about this prospect, especially in light of the fact that so many people actually WANT something like this to happen. Here’s a stunning post from Dean Baker (via Bruce Krasting) arguing that a default in the US wouldn’t be that big of a deal, because it wasn’t that big of a deal in Argentina. This is a pretty unreal comparison, given the vastly different places in the world held by the US today and Argentina 10 years ago.
The easiest way to think of the significance of a US default is to think of the way the banking system in Europe quivers just as the mention that maybe perhaps debt holders in Greece or Ireland might have to take a haircut in a controlled manner. Now multiply that significantly.
So why hasn’t the market reacted yet with concern? Probably because it’s just to big to contemplate, and it seems totally impossible that it would be let to happen.
Our guess is that if something cataclysmic were on the horizon, we’d have a day like the day when TARP was first rejected, that would scare politicians straight. But who knows. This is definitely the biggest (known) risk for the next couple of weeks.