Friday, May 22, 2009

Will The US Go Bust?

In case you hadn't heard, Great Britain's credit rating may drop. The US might join them in the tank:

S&P cut its U.K. outlook to negative. It said huge bailouts, soaring social costs and plunging tax revenues could push Britain's sovereign debt to nearly 100% of GDP.

Many investors quickly noted that the U.S. is on a similar path.

I don't think Treasury's behavior in the Chrysler bankruptcy helps us. The Indiana State Teachers Fund certainly sees a problem:

In a court filing on Wednesday, the Indiana funds accused the government of adopting a strategy of “the ends justify the means”.

They also said the Treasury “has taken constructive possession of Chrysler and is requiring it to adopt a sale plan in bankruptcy that violates the most fundamental principles of creditor rights – that first-tier secured creditors have absolute priority”.

Government debt is going to go up and the bailouts will not stem that tide. Undermining the fundamentals of creditor rights is not going to make it any better.

Does Geithner really believe differently? What will he do if Standard & Poor come to a different conclusion? A lot will be riding on that.

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