Suddenly, The “Unthinkable” Debt Ceiling Solution Is Becoming Mainstream

Washington DC

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It was just in early April that we were shocked to hear Chris Whalen argue for an intentional technical default on US debt.At the time this seemed like an obviously out-there viewpoint, but in just a matter of weeks, the Whalen view has moved a lot closer to the mainstream.

Just a quick rundown of some others on this bandwagon:

  • Bank Of America’s Jeffrey Rosenberg has made the ‘case for default’.
  • Hedge funder Stan Druckenmiller has made the case for a technical default now to clean up our house.
  • In our interview with him, Jeff Gundlach has said a technical default would be OK.
  • Fiscal expert Rep. Paul Ryan thinks a short-term technical default would not be a problem.

And those are just some very notable names.

This shift was acknowledged in a note this morning from Citi’s Steven Englander:

A breach of the credit ceiling is priced in neither fixed income nor FX markets to any significant degree now. Even two months ago there was a virtual consensus that a debt ceiling breach would be an unmitigated disaster for US asset markets. Confidence in Treasuries as the ultimate safe haven would be destroyed and there would very likely be spillovers into other asset markets. If investors or business were counting on using coupons or redemptions to meet obligations, there would also be the possibility of a series of business or investors defaults tied to delayed Treasury payments.

The revisionist view is that a breach of the debt ceiling would magnificently concentrate the minds of Congress and the Administration to reach a speedy deal on longer-term fiscal consolidation. In this view, if brinksmanship or even a few days delay in receiving a payment were the cost of long-term reform, it would be worth it. Longer-term attractiveness of Treasuries might even be enhanced if the deficit were put on a sustainable course.

What was previously way out of left field has come closer to the mainstream — a big problem for Tim Geithner, who has called a default “unthinkable“.