Goldman Sachs Defines the Word ‘Default’

by Business Insider | October 7, 2013 12:07 pm

Goldman Sachs Defines the Word ‘Default’

With less than two weeks to go until the debt ceiling is breached, there’s a lot of talk about the risk of a U.S. “default” and what happens if the U.S. does default.

Unfortunately, there’s a lot of sloppiness about the meaning of this word, default.

In a note examining the debt ceiling, Goldman Sachs provides a service talking about some meanings of the word, and how it’s used:

The term “default” has been used to mean a number of different things in the context of the debt limit. The media often refers to a failure to extend the debt limit by the deadline as a form of default, while lawmakers sometimes refer to any failure of the Treasury to make a scheduled payment to an individual or business as a default.  The two areas where a default is more narrowly defined are the rating agencies and U.S. sovereign credit default swaps (these definitions are independent of one another—a default in the eyes of a rating agency is not equivalent to a default for CDS purposes, and vice versa):

The prospect of a U.S. “default” sounds like a terrible thing, but it seems safe to say that a “default” on U.S. contractor obligations (or military pay or Social Security) would not have the kind of instantaneous, catastrophic ripple effects the way an actual missed Treasury payment would.

It’s tempting to say that the word “default” should only be used in the technical financial sense (defaulting on debt), though arguably from a broader perspective, a country failing to make some legal obligations (say, to its citizens) has cast its creditworthiness in doubt, even if it’s still making debt payments.

Bottom line, not all “defaults” as used by the media or by sell-side analysts are the same. Some are much scarier.

See Also:

Endnotes:
  1. GOLDMAN: Here’s What Happens When The Government Shutdown Meets The Debt Ceiling: http://www.businessinsider.com/government-shutdown-meets-debt-ceiling-2013-10?utm_source=investorplace&utm_medium=referral
  2. The Chart That Proves Concern About An American Debt Default Is Rising: http://www.businessinsider.com/the-chart-that-proves-concern-about-an-american-debt-default-is-rising-2013-10?utm_source=investorplace&utm_medium=referral
  3. Yields On Short-Term US Debt That Matures Right Around The Debt Ceiling Are Blowing Out: http://www.businessinsider.com/t-bill-yields-soar-on-debt-ceiling-fears-2013-10?utm_source=investorplace&utm_medium=referral

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