A new report from JPMorgan explodes the myth that a technical default by the US Treasury — a couple of missed coupon payments — would be no big deal.
The JPM report from analyst Terry Belton, which is getting the attention of players in the money market industry is titled The Domino Effect of a US Treasury Technical Default and it concludes that “any delay in making a coupon or principal payment by Treasury would almost certainly have large systemic effects with long-term adverse consequences for Treasury finances and the US economy.”
The biggest threat if the US defaults? A Lehman-like run on money market friends.
You’ll recall that post-Lehman, the breaking-of-the-buck of the money market reserve fund caused a gigantic ron on money markets that required a bailout.
The collapse in balances looked like this:
Beyond that, a technical default — which again, assumes that in short order the Treasury starts paying its coupon again — would have long-term adverse consequences on rates.
The most analogous situation to a US default in recent history actually happened in Peru in 2000, which defaulted despite not having any problems making payments.
There are other impacts as well. A technical default could have a similar impact on foreign willingness to hold Treasuries as the conservatorship of Fannie and Freddie had on GSE holdings by foreigners (they collapsed).
And of course, then, all of this would hit growth. JPMorgan estimates that we’d see a minimum 1% GDP hit thanks to higher rates and a presumed selloff in equities.
Of course, a default by the world’s most stable nation would probably have impacts in ways nobody can imagine, but one thing seems to be clear. The notion — as some people suggest — that a default would somehow increase US credit-worthiness is absurd.