The price of credit default swaps, which insure holders against government default, are now more expensive for U.S. treasury securities than for the same protection in Brazil, Greece, or Mexico, Bloomberg reported.
Those three emerging markets have repeatedly defaulted on their sovereign debts and have credit ratings far below that of the U.S.
These “insurance policies” have soared in price as Republicans in the House of Representatives and president Joe Biden remain at odds over Republican demands for drastic spending cuts before House Republicans will raise the debt ceiling so the U.S. can pay bills now coming due.
The swaps traded at 166 basis points on 10 May, close to a record and passing their prices in 2011 and 2013 when politicians also deadlocked over raising the debt limit.
A U.S. default could earn speculators in swaps a return of as much as 2,400 percent, according to Bloomberg’s calculations.
The U.S. is due to run out of money in less than a month and stop paying a large share of its bills, which would mean the country had defaulted on its debts for the first time in its history.
The power to raise the debt limit lies with the House of Representatives. In past years, the House has faithfully raised the debt ceiling every time the issue has come up.
This time, however, Republicans who control the House are refusing to raise the limit unless Biden agrees to cancel funding for several pieces of key legislation passed in the previous Congress.
Those pieces include adding staff to the Internal Revenue Service and incentives for green energy projects. Last week, Republicans also added several new border control policies to their demands.
House Republican leader Kevin McCarthy has said he opposes a short-term extension of the limit to allow more time to negotiate.
Biden has called for a vote on the debt limit by itself and offered to begin negotiations over priorities in the next budget.
Few believe the U.S. will actually default. However, a technical default—in which the country delays, but does not cancel, payment of its bills—would wreak chaos in the $24-trillion market in U.S. treasury securities, which Bloomberg called “the bedrock of the global financial system.”
The soaring price of the swaps indicates that gamblers believe the odds of a technical default are growing.
“It’s not a pure play that the treasury will default and remain defaulted,” lead analyst John Canavan at Oxford Economics told Bloomberg.
“In that sense, it’s different from countries like Greece or Mexico, where the concern would be that the government defaults and never pays you back or pays you back with a haircut,” he said.
TRENDPOST: Some pundits have suggested that, as the default date nears, Biden could unilaterally raise the debt limit by claiming power under the U.S. Constitution’s 14th amendment, which says “the full faith and credit of the United States shall not be questioned.”
While some have argued that it is constitutional to lift the debt limit, others argue that it is not, which in turn would bring it to the Supreme Court. Thus, the time it would take for the Court’s decision would be too late to avert the damage to the economy, job losses, and equities markets.
Rather than this being an economic issue, which it should become, as we have noted in previous Trends Journals, this is purely a political issue as we have noted that Republicans only use this demand when the President is a Democrat and they control the House. Indeed, during the Trump presidency they raised the debt ceiling with full support from the Republican party.
TRENDPOST: It should also be noted, but hardly a word from the Presstitutes, is the fact that the higher interest rates rise—which they have since last March from near zero to 5 percent to 5.25 percent range, the more it costs to service the increasing government debt.