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Default Will Add $100 Billion/Year to Deficit

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Zerohedge.com spoke to JPM head of fixed-income Terry Belton about the consequences to the federal deficit/debt if the debt ceiling is not raised in time to prevent a default or the ratings agencies downgrade our sovereign debt, i.e. Treasury bonds.

…Belton said that a 70 bps increase in interest would result in an incremental $100 billion in interest expense each year. As a reminder, this is roughly the amount that the NPV of a realistic deficit reduction plan over 10 years would chop off from the US deficit on a yearly basis. Simply said: the US downgrade alone, now virtually taken for granted by everyone, will offset any beneficial impact from any deficit reduction that will have to happen for the debt ceiling to be increased. And that, ladies and gentlemen, is why cash flows matters.

The next time you hear someone say a default won’t be a problem or will help tame the deficit, remind them that the financial experts on Wall St and around the world disagree completely.

As a side note, according to a source inside rating agency S&P, the Boehner Plan currently approved by the GOP House will not prevent a downgrade of the nation’s Triple A rating. The source added that S&P probably would be satisfied with Reid’s plan.

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Written by Valerie Curl

July 26, 2011 at 2:42 PM

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