Wall Street Journal
June 14, 2011
The default debate has gone global: In both the U.S. and Europe, markets are confronting questions about the sanctity of government debt. If handled wrong, this risks triggering a fresh financial crisis.
European politicians and central bankers are at loggerheads over whether Greece's private creditors can accept changes to their terms without triggering a default. In the U.S., there is talk of a "technical" default on Treasurys if agreement cannot reached in Washington on raising the debt ceiling.
The problem: If it looks like a default and smells like a default, it probably is a default. Using the word "technical" doesn't change the reality if some Treasurys aren't paid on time. The same goes for Europe. Even if banks "voluntarily" roll over their debt, it is hard to see that as truly an act of free will. Standard & Poor's downgrade of Greece to triple-C—making it the lowest-rated sovereign in the world—specifically fingers the latest German debt swap proposal as a default.
Europe's politicians may end up lending Greece more money, as the European Central Bank clearly opposes anything that resembles a default. U.S. politicians may agree to raise the debt ceiling from $14.3 trillion before the cut-off date of Aug. 2. Even after that, Treasury Secretary Timothy Geithner can prioritize outgoings to favor debt payments. But with a monthly budget deficit of $124 billion, according to Fitch, the risk to debt service will build quickly. On Aug. 15, $52 billion of payments are due.
What if politics means bond payments stop?
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