Cowen: Shutdown Brings “More Default Risk Than The Market Realizes”

Monday, January 22, 2018
By Paul Martin

by Tyler Durden
Mon, 01/22/2018

Echoing almost verbatim the bleak outlook on the US government shutdown laid out by Goldman on Friday in which the bank said the government closure could last “up to a few weeks” and become dangerous once it approaches the timing of the debt ceiling, Cowen’s senior policy analyst Jaret Seiberg writes on Monday morning that the danger of an impasse that would preclude reaching a deal to raise the debt ceiling, which the government will hit in March “is a bigger worry than a government shutdown that lasts several days or a week.”

According to Seiberg – who calls Trump an “unpredictable negotiator” over spending bill – pushing the spending bill into the debt ceiling time-line may make a package “even more politically toxic,” especially since Republicans may have more objections to raising the debt ceiling than Democrats;

On the other hand, the Cowen strategist sees little impact to financials and housing from a short government shutdown, as most housing programs will function, financial system oversight remains:

Fannie, Freddie will continue to operate; Ginnie Mae will continue to ensure principal/interest payments are made to investors; FHA can continue to approve insurance for loans, but those that require staff review might get delayed; if shutdown extends into weeks there may be problems
Fed, FDIC, OCC will continue to monitor banks; SEC will furlough employees, but key systems are governed by contracts.

Finally, Pantheon’s Ian Shepherdson agrees: should the government closure extend into March, then all bets are off:

In the worst case scenario, the budget impasse could drag on, via a series of stopgap measures, until March, perilously close to the point where the debt ceiling has to raised or suspended, as was the case from November 2016 through March last year. We would be astonished if Congress could not cobble together a majority of the sane in order to prevent a default. But astonishment has been quite common in response to events over the past couple of years, so investors would be well-advised to rule out nothing, however outlandish.

The market’s reaction to this warning? New all time highs in the S&P and Nasdaq.

The Rest…HERE

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