Would a short-lived default be that bad?

Marketplace Staff Jun 8, 2011
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Would a short-lived default be that bad?

Marketplace Staff Jun 8, 2011
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JEREMY HOBSON: Let’s get some analysis now from Richard Dekaser. He’s an economist with the Parthenon Group and he’s with us live from Boston, as he is every Wednesday. Good morning.

RICAHRD DEKASER: Good morning.

HOBSON: So what do you think, Richard, would a short-lived default be so bad for the U.S. economy?

DEKASER: It’s very hard to say how foreign investors in particular are going to respond to a short term default. But I think it’s possible that it would not be as apocalyptic as people had feared. But I think that misses the larger point. It’s not what happens on August 3, it’s what happens for the decades to follow. If the U.S. defaults on its debt if could suffer a permanent – and when I say permanent I mean ten years or more — impairment of its credit-worthiness. And the long-term consequences there would unambiguously be bad.

HOBSON: Why would it suffer for ten years or more because of just a few days of a default?

DEKASER: Well one of the reasons that investors flock to U.S. securities is because they believe them to be free of these kinds of risks. Payment is made on time and without question. If that fundamental premise is challenged, you could see investors confronting greater risks. They would charge for that risk. We would have to pay them more in interest rates. And even if it was small – just say a tenth of a percentage point — over decades that would amount hundreds of billions of dollars. And the irony is it would impair our budget situation, rather than improve it.

HOBSON: Richard DeKaser, economist with the Parthenon Group, thanks so much.

DEKASER: My pleasure.

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