Monday, July 25, 2011

The Debt Ceiling Fiasco And Student Loans

If the US loses its triple A status, investors might end up selling off their student-loan backed securities. The $250-billion government-backed securities would be hit hard. This concern is only being framed into terms of how it would affect the markets. If those securities are shaken, what does that mean for the debtors who owe the loans? What sort of disastrous results could occur in their world?

Related Link

"The Debt Ceiling: Why It's a Real Issue for the Indentured Educated Class," AEM (July 25, 2011)


LSTB said...

The Bloomberg article doesn't specify who's rating the bonds, which is bad enough. If it's S&P and/or Moody's--and we know it is--the response is to belly laugh at them. These are the same ratings agencies who claimed subprime housing loans were investment grade. Now they think that a government that owes money denominated in the very currency it prints is somehow a credit risk. They need to take a lesson from how they treated Japan. In 2002, S&P reduced its bond rating, and now 10-year Japanese bonds are trading at, like, 1%. So anyone who sells SLABS thinking Uncle Sam won't pay are fools.

As for the debtors, nothing will happen to them. They'll still owe the money no matter who owns the SLABS. If the banks are right as Bloomberg reports, and the government guarantees are no good, then the banks go under when everyone defaults on their student loans, unless they get TARP II: Return of the Bailout, which brings us to where we were in 2009.

Cryn Johannsen said...

@LSTB I remember writing an article that covered a panel in South Korea with the CEO from Moody's on it. I recall my colleague at the time saying, "I wish someone would ask him a hard-hitting question about their role in the subprime fiasco." Of course no one did. (Boy that panel made me sick to my stomach). Your remarks give me such hope, too! Tarp Deux? CAN'T WAIT!

Unknown said...

How will they be able to sell of their student loans? So confusing, especially because it is just my first time getting into loans and I still don't have any experience on loaning yet.