Nomura warns: U.S. default will arrive in the first half of June

Investing.com – The negative tone continues in the markets with falls exceeding 1%, as expert predictions burn around the United States debt.

This is the case with Japanese bank Nomura, which in its latest report on U.S. debt maintains its forecast that the Treasury will exhaust its financing resources during the first half of June.

“Our daily fiscal deficit tracking estimate, a rough proxy of financial needs for each month, suggests that the total government financing needs through 15 June, when the quarterly tax payment will provide additional funding, will likely exceed the cash and extraordinary measures available to the US Treasury,” Nomura explained in its report.

The amount available to the Treasury stood at $357 billion at the end of April and $160B on May 17. In its recent note, the Congressional Budget Office (CBO) estimated that the federal government’s financing needs for May and June are between $200B and $300B, and between $75B and $100B, respectively, with the May deficit likely to be around $250B or more.

In her latest official statement to Congress, Treasury Secretary Janet Yellen said that the Treasury will likely no longer be able to pay all its obligations as of June 1. “However, as the X-date approaches, we expect Treasury to update their X-date projection. We think Treasury’s definition of the X-date could be different from what most market participants believe,” the Japanese bank explained.

Effects of default

“In the case of a short-term default, we expect Treasury to prioritize debt payment over its other obligations,” Nomura analysts said. “The Council of Economic Analysis (CEA) estimated a ‘short-default’ would reduce jobs by half a million, weigh down annualized real GDP growth by 0.6pp, and push up the by 0.3pp. In the case of ‘a protracted default’, the CEA would expect the unemployment rate to increase by 5pp and annualized real GDP growth to decline by 6.1pp,” they added.

According to Nomura’s report, in 2013 the Fed conducted a simulation to identify the impact of a short-term debt default on the economy. Their assumptions include increases of 0.8pp and 2.2pp in yields of bonds and BBB corporate bond yields, respectively, a 30% drop in stock prices, a 10% depreciation of the , and shocks to confidence among households and businesses.

Credit rating agencies could downgrade the credit rating of US sovereign debt, even in the case of the Treasury prioritizing debt payments to avoid an immediate default.

(Translated from Spanish)

Source link