Default...What Default?

According to definition, a Financial Default is when a debtor has “violated a loan covenant of a debt contract”. So in the case of for example Greece, yes the country will default its debt because it cannot pay its obligations to creditors despite all the aid it received.  Or what happened to Russia back in 1997 and Argentina later on as when the due dates came, these countries could not meet their obligations.

The credit rating agencies have threatened the US markets with a downgrade of the US debt. Remember, these are the same agencies that back in 2006 gave “sub prime mortgage backed securities” a AAA rating !!!!

The recent losses in the US Stock Market are mainly because of some disappointing corporate earnings reports and to a lesser degree because of a possible “default” by the government. We can conclude this because of the behavior in the price of Treasury Notes, where the 10 year has remained stable with a yield at around 3%. So we believe that fixed income investors have already discarded debt related problems

Who are the holders of Government Obligations? For starters US Institutions and Private Investors hold 42% of the national debt, followed by the Social Security Department with 18%, Civil Service and Military sectors have 8%, China 7.5% and the remainder is 24.5% is spread out amongst various other countries.  Is it possible that politicians would “default” on their own people that elected them?

And what about the budget, where does the money go? Well 23% goes to Medicare and Medicaid, 20% to Social Security, another 20% to Defense, 6% is for interest payments (yes only 6%!), and the reminder 31% pays government salaries.  Maybe Senator Boehner should look at reducing the salaries in Congress contributing to the needed cuts. To this date what has been said is that the US is at “risk” of a default. But what default are they talking about?

Given the above we can point out the following matters:

·         The US government reached the $14.3 trillion “ceiling” a few months ago, and is operating with surplus taxes collect.

·         The deadline of August 3rdd is approaching rapidly.

·         Congress must authorize a raise in the Debt ceiling.

·         Republicans what cuts with no new taxes and Democrats want new taxes. Frankly, no nation can function is taxes are not collected accordingly and government shows responsibility when spending OUR money.

·         We believe that a “default” is highly unlikely and there is about a 25% chance that the AAA Credit Rating will be lowered.