8/6/2019 Morning News Notes: 2011-05-27

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Friday, May 27, 2011 – my comments are in italics

The American Trucking Associations’ advance seasonally adjusted (SA) For-Hire Truck Tonnage

Index decreased 0.7 percent in April after gaining a revised 1.9 percent in March 2011.

The European Central Bank is opposed to a restructuring of Greek sovereign debt, and has

warned that it may have disastrous consequences. This warning may be ignoring one potential scenario,

whereby Greece defaults on bonds held by non-residents, while at the same time continuing to service

debt held by residents. This option could seriously reduce the country’s obligations as 61.5 percent of 

Greece’s government bonds are held by foreigners. – Bloomberg 

61.5%

38.5%

Greek Gov. debt held by non-residents Greek Gov. debt held by residents

8/6/2019 Morning News Notes: 2011-05-27

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  A bipartisan group of over 30 Senators will send a letter today to federal regulators urging them

to rewrite the controversial new rule requiring mortgage originators to retain at least 5 percent interest

in loan pools – Politico 

Republican lawmakers are ratcheting up pressure on the White House to clarify how payments

would be prioritized in the event of no debt ceiling deal being reached by the Aug 2 deadline. It

increasingly appears that a large block of the GOP doesn’t view the Aug 2 date as very important and

believes the Treasury possesses the right to prioritize payments as it sees fit (and Republicans know tax

collections on a monthly basis are large enough to cover debt servicing costs).  – FT – as has been stated 

before, the market was viewing a debt ceiling debate as a good thing. The thinking is that if a short term

technical default is what it takes to get the long term fiscal house in order, then the credit quality of the

US is better off. There is a problem with this, however, if such thinking becomes too pervasive. The

bargaining chip for the policy makers who want to reduce the deficit is premised on the idea that a

technical default would have catastrophic consequences (i.e. dollar asset selloff, risk asset selloff, interest 

rate spike, etc. Not to mention possible suspension of social security checks and/or medicare

reimbursements) We are not seeing any of those things even though the possibility of a technical default 

has increased along with the ratcheting up of brinkmanship rhetoric from the republicans. Why is this

 problematic if we are not seeing any of these ‘bad’ consequences? Because, by responding to an

increased possibility of default in a benign manner, the market is, paradoxically, taking away the very 

bargaining chip it needs to get the fiscal house in order. People Politicians rarely make difficult changes

voluntarily …such change must be forced. Are policy makers going to voluntarily reduce spending and/or 

increase taxes? Probably not. The market may have to force this upon them by positioning for the nasty 

consequences of a technical default, thereby restoring the bargaining chip that is necessary at the

negotiating table. Has the benign view of a technical default run its course? Probably the first sign of 

this would be credit risk seeping into US treasuries (the supposed risk free asset), evidenced by an uptick 

in the cost to insure US debt (the cost of a Credit Default Swap CDS).