Tuesday, July 26, 2011

The self imposed debt limit

Right now all eyes of the world including the financial markets are on Washington that if the two political parties come out of the bickering politics and raise the National Debt limit. It is really disturbing to see that both the political parties think that they have the best interest in their hearts for their voters and are sticking to their guns. They are not realizing the impact of default since it has not happened before. I have always studied in finance courses that the U.S. government securities are the safest in the world and all other securities keep them as their benchmark when they have to price their own securities. We also read that it is inconceivable that the U.S. government will not pay its obligations and will somewhat default sending the interest rate higher.

But now the increasingly unthinkable has started to happen and the markets are readying themselves up in case of the government default on its debt obligations. So the once thinkable has started to become thinkable. I really don’t get this self imposed debt limit that the U.S. government has put it in. If you really care about your debt rating and will ultimately pay your obligations, why do you have to put the world on edge just to get some point scoring. If you fail to increase the debt limit, then you will raise the interest rate across board. And once this happens, then what benchmark should we use to rate other securities.

No comments:

Post a Comment