The IMF and Lady Luck

A turbulent day and a sigh of relief seems to be the conclusion following the Greek vote. Europe and the IMF are happy with the outcome, for Greece mega austerity and a giant wall of debt refunding are on the menu. Concerning the IMF position on this rescue mission and what was said on debt policy world-wide, there is plenty of room for controversy however. Next to commenting on Greece - the necessity to approve the austerity package deal as a quid pro quo for the next IMF tranche funding - the IMF and Timothy Geithner yesterday commented on the US as well. To quote current IMF chairman John Lipsky :

"The effects of a debt default in the United States government debt market would have serious repercussions not just here but elsewhere. We think that is an outcome that the responsible parties will avoid. And of course , the federal debt ceiling should be raised expeditiously to avoid a severe shock to the economy and world financial markets. A failure to raise the ceiling in time could lead to a downgrade in the United States' coveted AAA debt rating and send interest rates soaring."

And Timothy Geithner gives this strange brew an extra ingredient :

"Prioritizing government payments to avoid a debt default would spur deep cuts in other disbursements and still cause investors to shun U.S. Treasury securities. Ultimately, the notion of 'prioritizing' payments is futile because the debt limit must be increased regardless of which spending path is adopted . There is no credible budget plan under which a debt limit increase can be avoided ."

So whatever budget plan is voted upon over the coming weeks, an increase in the debt ceiling is a sine qua non for the sake of credibility. And if the US debt ceiling is not increased, default and downgrades are on the menu sending global financial markets into chaos. On these possible downgrades, first estimates released earlier this week would indicate that a 1 notch downgrade from AAA to AA+ on Uncle Sam would lead to a 37 bp rate increase and hence some 100 bio USD loss on the total amount of outstanding US Treasuries.

Now this philosophy stands in bleak contrast to what Greece is experiencing today, as is Portugal and Ireland. Looking at Portugal for instance and comparing its key budget indicators to the US, we come to similar results : a 9% current deficit and 93% debt/GDP ratio. Portugal has voluntarily announced a second initiative to privatize state owned properties in order to stabilize its debt. Its current funding conditions (ref ECB 1,25-1,50%) are in between 13 and 11% on the yield curve. Now lets return to the US and its funding conditions : 0,45% (2y), 1,67% (5y) and 3,09% (10y), implying negative real interest rates along a major part of the yield curve. It becomes even more strange when looking at money market conditions. Three month "rock solid" US Treasury bills are flirting with ground zero and even recorded negative bid yields over the past couple of days.

Date 1 Mo 3 Mo 6 Mo 1 Yr 2 Yr 3 Yr 5 Yr 7 Yr 10 Yr 20 Yr 30 Yr

06/01/11 0.04 0.05 0.11 0.18 0.44 0.74 1.60 2.28 2.96 3.83 4.15

06/02/11 0.04 0.04 0.11 0.19 0.45 0.78 1.65 2.34 3.04 3.92 4.25

06/03/11 0.04 0.04 0.10 0.18 0.42 0.75 1.60 2.28 2.99 3.90 4.22

06/06/11 0.03 0.05 0.10 0.18 0.43 0.74 1.60 2.29 3.01 3.92 4.25

06/07/11 0.01 0.05 0.11 0.18 0.39 0.74 1.59 2.29 3.01 3.94 4.27

06/08/11 0.01 0.04 0.11 0.18 0.39 0.68 1.52 2.24 2.98 3.88 4.20

06/09/11 0.02 0.05 0.10 0.19 0.43 0.73 1.60 2.30 3.01 3.91 4.22

06/10/11 0.02 0.05 0.10 0.19 0.41 0.71 1.58 2.28 2.99 3.87 4.18

06/13/11 0.02 0.05 0.11 0.18 0.40 0.72 1.59 2.30 3.00 3.89 4.20

06/14/11 0.03 0.05 0.11 0.19 0.45 0.79 1.70 2.41 3.11 4.00 4.30

06/15/11 0.02 0.05 0.11 0.19 0.38 0.68 1.55 2.26 2.98 3.89 4.19

06/16/11 0.02 0.05 0.11 0.18 0.38 0.68 1.52 2.22 2.93 3.84 4.16

06/17/11 0.02 0.04 0.10 0.17 0.38 0.68 1.53 2.23 2.94 3.86 4.19

06/20/11 0.02 0.03 0.10 0.18 0.38 0.68 1.55 2.25 2.97 3.87 4.19

06/21/11 0.01 0.03 0.10 0.18 0.40 0.69 1.57 2.27 2.99 3.90 4.21

06/22/11 0.01 0.02 0.09 0.16 0.39 0.68 1.58 2.29 3.01 3.91 4.22

06/23/11 0.01 0.01 0.07 0.15 0.35 0.62 1.48 2.19 2.93 3.84 4.17

06/24/11 0.01 0.02 0.07 0.16 0.35 0.57 1.40 2.13 2.88 3.83 4.17

06/27/11 0.01 0.02 0.10 0.18 0.41 0.64 1.47 2.19 2.95 3.94 4.28

06/28/11 0.01 0.03 0.11 0.21 0.48 0.75 1.62 2.33 3.05 4.01 4.33

06/29/11 0.01 0.02 0.11 0.19 0.47 0.79 1.70 2.44 3.14 4.08 4.39

Does this all make sense ? Those making an effort have a rough ride for the time being, others are considered to be safe haven numero uno with the support of "Lady Luck" and "the Ben Bernank", regardless of the budgetary outlook and an increase of the debt ceiling. So far they have pulled off the trick, remains to be seen how it will develop over the coming weeks (02/08) and the fact that 75 bio USD of monthly Treasury demand will evaporate after today.