Probability of Debt Default Has Risen 300 Percent Since Start of Year: Report
The likelihood of a U.S. bankruptcy has gone up by 300% since the beginning of the year.
recent report from MSCI, an American financial service provider, warned about the tripling of a debt default and said that Congress must pass a spending bill to avoid a disaster in the next few months.
“Implied default probabilities have increased to levels not seen since the 2013 debt-ceiling debate,” MSCI reported.
According to the financial service provider, the likelihood of the United States defaulting on its debt has increased from 3.3 percent in January to 11.3 percent last week.
On Jan. 19, the Federal government reached its debt ceiling of $31.9 billion. The U.S. Treasury Department had to take extreme measures to prevent a default and keep operations running through June.
A divided Congress has so far not agreed to pass a spending bill to avoid a federal default, making some investors uneasy based on a rise in trading activity in credit default swaps (CDS) on the debt.
“Since mid-January, however, there has been a very noticeable pick-up in activity on U.S. CDS.”
Credit default swaps can be used as insurance to protect against creditors not paying their dues.
Credit default swaps were used by some investors who successfully bet against the housing market in 2008.
CDS Protection Payouts will be activated if there is a default on a debt payment.
Unified Congress at War with WH over Debt Ceiling
“Historically, CDS on the U.S. government attracted little interest in the market and were thinly traded. CDS on emerging-market sovereigns generated the vast majority of single-issuer trading,” reported MSCI.
The leverage that the debt ceiling gives to the Republicans of Congress is used to pressure Democrats into agreeing to spend cuts and reducing the federal deficit.
Kevin McCarthy (R.Calif.), Speaker of the House, stated that in February “defaulting on our debt is not an option. But neither
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