IMF ponders the improbable: Will U.S. default?
Will the U.S. government ever default?
It’s not a pleasant thought for anyone holding some of the roughly $9 trillion in U.S. government bonds and notes currently in public hands – or for anyone hoping the global economy can stay on an even keel.
But the economists at the International Monetary Fund are paid to ponder the improbable, and in papers published on Wednesday fund staff examined where the U.S. and other developed countries fit on a continuum between easy living and disaster.
We’re farther along than you might think.
Using a concept known as “fiscal space” – basically how much latitude a country has to borrow before markets will shut off the spigot by demanding unsustainable interest rates – the IMF staff drew a bright red line through five nations it considers to be running out of room: Greece, Iceland, Italy, Japan and Portugal. Of the 23 developed nations it analyzed, four others, including the U.S., received a yellow caution flag.
Does it mean default is imminent or inevitable? Hardly – and in companion articles the fund discussed the steps being taken to control public debt, and broadly discounted the chance of an outright sovereign default among any of the advanced countries.