Peter Hoskin

What happens if the US defaults?

The homepage of the Washington Post has a clock ticking down to America’s debt-ceiling deadline: four days, 14 hours, and a fast-declining number of minutes and seconds. It also has details of the events, last night, that upset the prospect of a deal being reached yet again. The Republican Speaker of the House of Representatives, John Boehner, had been frantically trying to corral support for a bill that would raise the ceiling in exchange for $billions of extra spending cuts. He only needed 216 of the House’s 240 Republicans to vote with him. But it wasn’t to be. The vote was called off, postponed until at least later today, as it became clear that Boehner couldn’t immediately persuade those in his party who want further cuts still. Even if a tweaked version of his bill passes today, it’s likely that the Democrat majority in the Senate will kill it off anyway.

The Asian markets have already quivered at the developments, and others will surely follow today. Although some are suggesting that last night’s muddle was caused less by hardline opposition to Boehner’s bill and more by Republican Representatives wanting to sleep on their decision, there is clearly more uncertainty now that a deal will be reached in time. And uncertainty, too, that any deal will have the necessary heft to persuade the credit rating agencies. Indeed, a report released by Citi yesterday suggested that there is an 83 per cent likelihood that both a deal will be reached and the US sovereign long-term rating is still downgraded to AA.

But what if there is a default? That same Citi report puts it at 5 per cent likelihood — and also describes the possible outcome.

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