The Debt Limit - if Everyone is at Risk, is No One at Risk?

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by: fxsolutions
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Date: Sun, 14 Aug 2011 Time: 7:19 PM
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Joseph Trevisani is Chief Market Analyst at FX Solutions (http://www.fxsolutions.com/). Calling on 20 years of experience in forex trading, he frequently provides Forex traders with an overview of currency market activity and news. On 29th July, he takes an overview of the debt limit and its possible expansion beyond America.

"The United States is the world's largest economy, its financial markets are the deepest and most liquid, its financial system is the keystone to global markets and its currency is the world's currency. The debt limit negotiations in Washington and the American sovereign credit rating are not specifically American events.

The debate and conclusion in the American capital will register with all economies and all markets, but, perhaps surprisingly, there will be few differential developments. US markets will not be singled out for investor ire; the bond markets will not desert Treasuries. If there are financial market gyrations they will happen worldwide; if a partial Federal government shutdown throws the US into recession, the rest of the world will soon follow.

The central position of the US economy and markets in the global economic system will prevent any singular American effect. Markets and investors cannot punish American debt and equities without spreading the pain worldwide.

Much of the media coverage about the debt limit has been focused on the possibility of US default. There a vanishingly small probability that the US will default on its debt but the media obsession with the idea has obscured the real implications of the debt limit discussions in Washington.

Herewith a brief list of predictions:

• US Treasuries will retain their position as the safe haven of choice.

• Risk analysis is choice. If not US Treasuries, then what? Until that question can be answered Treasuries will remain paramount.

• The relatively small flows that have headed to gold and the Swiss Franc are incidental to world finances, neither can replace Treasury volume.

- Credit markets are forward looking, if there was to be a move against US Treasuries it would have happened weeks ago.

- The rating agencies threat to downgrade US securities does not provide any new information. Is there anyone on the planet who does not know what is going on in DC, the disabilities of the US deficit are an old story.

- The markets are perfectly equipped to make their own decision about US debt limit, deficit and credit rating, rating agencies aside.

- The credit markets, particularly the government debt market have been unwavering: US Treasury yields have come off in July and are not far from their lows for the year.

- There is no penalty for US fiscal profligacy.

- What has been true for Treasuries is also true for the dollar.

- There has no penalty for the dollar from the Washington mess because:

- 1) Its main competitor, the euro, has even more difficult problems.

- 2) There is no competitor able to fill the dollars role in the world economy unitl there is Washington cannot be restrained by world markets".

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About the Author

About FX Solutions

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