Mal paso

Aquí, en el FT, un esquema muy sencillo de lo que les explicaba ayer: consecuencias de un  default del Tesoro USA por el bloqueo de las negociaciones del Congreso. La deuda pierde valor como activo, lo que hace subir sus tipos de interés, subida que se repercute inevitablemente en los mercados de deuda privados. La deuda es además el principal colateral en las operaciones interbancarias, que se harán más caras para los que necesitan dinero.Al perder valor y seguridad en su cotización futura, se le aplica una penalización mayor . Es como si subiera de nuevo el tipo de interés. En el mercado monetario, eso se traduce en una contracción del efectivo en circulación (el dinero prestado por la FED se ha encarecido). El crédito bancario se contrae en un momento en que se habla de segunda caída en recesión. lamentablemente esto repercute en todo el mundo.

Reproduzco el texto completo que es muy pedagógico.

Concerns are mounting that the US could default on its debt obligations if no agreement is reached on the country’s debt ceiling. But what exactly would be the consequences? The repo market would take a big hit for a start.

What is a repurchase agreement?

Why are repurchase agreements important for the functioning of the financial system?

Loosely speaking, a repurchase agreement, or “repo”, is a loan collateralised by securities. For example, a bank might borrow $100m for one day, putting up $103m in bonds as collateral. Provided the bank pays back the loan with interest the next day, the bonds are returned. The extra $3m of collateral is called a “haircut,” protecting the lender from an unexpected drop in the collateral value of the bonds.

Repos are typically the simplest and cheapest way for large financial institutions to finance their enormous holdings of fixed-income securities. Every day, repos are used to finance several trillion dollars worth of assets.

What role do US government securities play in the operation of the repo market?

Historically, US government securities, or “Treasuries”, are the most preferred collateral in the world because of their high liquidity and low credit risk. Haircuts on Treasury repos are extremely low, recently around 2 per cent. This means that a firm can purchase $102m in Treasuries by investing only $2m in new cash and offering the same Treasuries as collateral against a $100m loan in the repo market. Treasuries make up a large fraction of the collateral backing repos.

What will happen to the repo market if the US defaults on its debts, or if US government securities are downgraded?

In either case, the desire for Treasuries as collateral would weaken. The prices of Treasuries would also be likely to decline. On top of the direct losses to Treasuries investors, haircuts would rise, forcing these investors to put up more cash to maintain repo financing for their positions. This could cause some forced sales of Treasuries, further reducing Treasury prices. In any case, higher haircuts would damp the demand for Treasuries.

How would disruptions in the repo market affect the average person?

Reduced demand for government securities as repo collateral would force the US government to offer higher interest rates on Treasuries in order to sell them. This is on top of any increase in interest rates that investors would demand in compensation for higher default risk. The average US taxpayer would need to pay more taxes to cover the US government’s higher interest costs. In addition, corporate and consumer interest rates are traditionally marked up over the government’s cost of borrowing. Assuming that practice continues, interest rates on credit cards, mortgages and business loans would rise, on average.

What is the worst case scenario?

If confidence in the value of Treasuries is badly shaken, haircuts could rise sharply and Treasury prices could drop noticeably. The ripple effects from the reduction in demand and forced selling could lead to a further drop in prices, leading to higher haircuts and more price declines.

Would the damage from a downgrade or default be reversible?

It has taken many decades to build the reputation for credit quality and liquidity that Treasuries have had. It would probably take many years to repair the damage in reputation caused by these events.

Darrell Duffie is the Dean Witter Distinguished Professor of Finance at Stanford University’s Graduate School of Business. Anil K Kashyap is the Edward Eagle Brown Professor of Economics and Finance at the University of Chicago’s Booth School of Business.