Letters: Debt default unlikely

There has been ample discussion among experts and commentators on the potential repercussions of the US defaulting on its debt. It may dampen the macroeconomic sentiment in terms of employment and output, cause a flight of capital from the US (and possibly Europe) to emerging markets, raise the premium on Treasury interest rates, worsening the budget deficit, and harm world exports.

These fears, however, are overrated for two reasons. First, there is no precedent. The Treasury has never before failed during a debt-limit impasse to meet a payment obligation and it seems unlikely that the officials presiding over the current debt scenario will allow for a situation that may have worse ramifications for the US economy than the 2008 financial crisis. Second, a 2012 report by the Treasury's Office of Inspector General considered two likely options in case the Treasury exhausts its borrowing authority and cash to pay all the bills. It can either prioritise payments (laying special emphasis on interest payments) or make all of each day's payments together, once enough cash is available. For example, all of October 18th's payments can be made on October 20 if enough cash is generated through revenue collections by then. Similarly, all of October 19th's payments can be delayed by a couple of days until sufficient revenue is received.

To be sure, the government may have to significantly cut down on spending (as much as 32 per cent according to one report) to accommodate the budget until the debt ceiling is raised. That would put significant pressure on the domestic economy. A default, however, is improbable.

Harsh Vora Vadodara

Letters can be mailed, faxed or e-mailed to:
The Editor, Business Standard
Nehru House, 4 Bahadur Shah Zafar Marg
New Delhi 110 002
Fax: (011) 23720201
E-mail: letters@bsmail.in
All letters must have a postal address and telephone number