Nomura: US Downgrade May Cause Repo Market Liquidity Freeze

Tyler Durden's picture

Tired of all the lies that a US downgrade will have no impact whatsoever on unsecured funding be it money markets, repo or so many other shadow banking system components (full list is below)? So are we. Which is why we were very interested to read the following summary of a Nomura research report that a US downgrade "may cause a repo liquidity freeze." Remember the Ice-9 in money markets following Lehman? Well, it may not be quite as big as money markets (last at $2.7 trillion), but at $1.3 trillion, frozen Repos will certainly cause a lot of headaches, especially with a dramatic scarcity of short-term Bills available in the market place for replacement capital flow. For all those wondering why the Fed and the BIS have been writing paper after paper (here, here and here) warning about the potential complications arising from the shadow banking system, this is precisely the reason.

From Nomura, as summarized by Bloomberg:

  • Risk of U.S. downgrade and default may have more impact than the lack of debt ceiling resolution - may cause repo market liquidity to freeze and “keep money markets in risk aversion mode,” Nomura strategists led by George Goncalves write in note.
  • “A default scenario will severely disrupt the repo market by increasing haircuts, causing dislocations between securities with and without defaulted coupons and potentially freeze up repo liquidity all together”
  • A downgrade won’t “trigger forced selling” in money market funds since 2a-7 rules define any U.S. government securities as “first tier”: Nomura
  • Money funds may choose to reduce exposure to U.S.
  • Treasuries that could be “at risk of missing coupons in case of default”: Nomura

And here is a graphic breakdown of all the shadow banking system components. These are precisely where all the adverse side effects will be concentrated as soon as the headlines hit that the US is no longer AAA.

Those wishing to learn more are urged to read the following presentation from the FRBNY which in addition to manipulating capital markets makes pretty presentations.

Shadow Banking Fed

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Popo's picture

Just because their business model didn't account for this possibility, does not make it everyone else's problem.   One must point out that this is the *industry* of financial modeling.   Accounting for potential issues such as downgrades is *the whole* game.

Heads need to roll.  Banks need to collapse.  

We will rebuild.  (Without them).

Let's get the creative destruction started.  Bring it on.

AldoHux_IV's picture

Agreed, and there are many short term solutions that would allow businesses to access commercial paper in order to keep the lights on-- the world under this current financial system is insolvent and there are far too many gimmicks out there perpetuating the illusion of solvency and the necessity to bury us further into debt.

bob_dabolina's picture

Nomura says Nomora' liquidity

Jim in MN's picture

With fo' on the floora

Gonna hit like a two-by-foura

malikai's picture

It won't happen. This drama is over tonight. Silver and crude are saying everything we need to know.

Popo's picture

SKF is still saying somebody's going to eat a shit-sandwich.   And that someone is probably a bank or two...

slaughterer's picture

Trying to tell the Turdites / ZHers to short silver into this event will guarantee at least a few dozen presses on the red downward arrow.  Watch my downward arrow count add up. 

Nomura report was wasted energy.   Default not going to happen.  Barbaric relics will be sold ferociously on any sign of progress in the deal.  Today was the proof.  Over night will be even worse as the Asians are given advance word of the deal via Timmy's red phone hotline to Beijing.         

Terminus C's picture

Is that because raising the debt ceiling is the solution to our indebtedness?  Silver and gold may retract on the news but only because people are retarded enough to think that allowing the government to borrow whatever it wants against the productivity of our great grand children is good for the system.

Default can happen or not happen, none of the fundamentals for silver and gold ownership changes either way.

traderjoe's picture

Silver bugs here don't day trade on the latest news flow. That's a suckers game, and you can have at it.

None of these deals change the long-term path of fiat. If, after watching this all, you think we will ever pay back the debt - well then I have a bridge to sell you. But personally, I only accept gold and silver for payment. You can take your broken and fraudulent promises somewhere else.

mt paul's picture

fork lift long


nov 2008...


no change in position ..

geminiRX's picture

I love PMs, but I am fully expecting a large correction soon once the ceiling is raised. People expecting default next week will be very disappointed

Bastiat's picture

I suspect any momo chasers in PMs got their stops hit today.  As Traderjoe said above: it doesn't matter, long term.  A fiat market full of Sound and Fury. 

redpill's picture

Leaving the debt ceiling in place and prioritizing interest payments would ensure our credit rating and fiscal future remain sustainable.  It's the responsible thing to do.


lizzy36's picture

What it will ensure is about $200B comes out of the economy in August alone. Plunging the US into an immediate double dip.

You know what cold turkey does to a long term addict? Kills them.

I am not talking about the Stock Market here. I am talking about the real economy.

What is needed is a responsible plan that allows for withdrawl not cold turkey.

However, even i admit that plan ain't likely to come from Washington.

Wow what a clusterfuck. 

Rodent Freikorps's picture

No kidding. The problem is that in our system it is the addicts who are in charge of the stash.


GeneMarchbanks's picture


You can't kill something that is already dead. Don't get sucked into The Finality of these affairs. Maybe they pass some barely coherent piece of legislation or not. We'll still be here and mostly OK. Sure underwear changes will be needed, asthma medication re-filled, antidepression pills popped like M&ms but here damnit!

Until we're talking about who is being bombed, I'm staying cucumberishly cool.

Your Friend


redpill's picture

No long term deficit solution is even being discussed.  Nor will it be.  Therefore the only option left is to force them to make the necessary spending cuts to get our house in order today.

They could instruct the Federal Reserve to destroy the Treasury bonds they are holding and we'd lop $1.6T off the debt tomorrow.  Voila, there's your withdrawl allowance.


macholatte's picture

Yes. Yes. Yes.

I've been asking about that same thing for quite some time in the hope that somebody knowledgable would contribute their perspective. Yet no comment.

At the end of the day, the $1.6T is not really "debt" because the interest the treasury pays is given back. It's an increase in the money supply and as such should be debt free. All the fees that were sucked off by the PD's due to the screwball way the transactions were handled (QE) made it expensive for the country and lucrative for the PTB.

Anyway, if someone out there has any insight on this, please comment.

{disclaimer: we disavow any liability for typoses withpout a spellchecker}

MachoMan's picture

Sometimes death is a more humane option for long-term addicts...  in that their kids have been taken away (and hate them), they have no job prospects or ability to earn a wage or other living, they cannot even drag skank ass anymore, their prospective physical health will be painful and their level of functioning has been permanently decreased, they're crazy, no one wants them, they have no place to go, and no prospects for improvement of life.

Essentially, what you're advocating is a slow death.  We're past the point of no return on both our on and off balance sheet debt...  coming up with a plan to take us off stimulus in a drawn out fashion does nothing to change this fact...  you can have a dollar collapse today or two years from now, but it's coming.

Our only solace is that we'll get to rummage in the trash bins with europe and japan...  hopefully we've stolen enough oil to mitigate others' relative ascendancy. 

traderjoe's picture

The system is performing exactly to plan. There was never any intent to pay back the debt. The debt is a FRAUD - with the interest payments the grift and debt-slavery and control the goal. Sovereign countries do not need to borrow 'money'!

See the United States Note - no debt, no interest.

Mercury's picture

Actually, narcotics withdrawal won't kill you.  You'll wish it did but it won’t.

Alcohol, yes, Valium and other meds, possibly…but narcotics, no.

Anyway, the right analogy here is thievery, not addiction.


macholatte's picture

addicted to thievery....... definition of kleptocrat

Newsboy's picture

Cold-turkey from (h)opium, causes, fevers, shivers, sweats, watery eyes, watery nose, watery mouth, watery stool, intestinal cramps, vomiting, insomnia and sometimes vivid hallucinations.

No death.

DTs from alcohol can cause seizures and death, same with barbiturates, but the worst thing for junkies is the fear as they start slipping into cold turkey. the fear will make them do anything.

"No choice, had to..."

JailBank's picture

Sounds bullish to me.

baby_BLYTHE's picture

Remember, when Andrew Jackson tried to end the Second Bank of the United States the central banker, Nicholas Biddle, reacted by violently drawing down the money supply- causing a Depression.

If the US were to default on the 1.6 trillion of treasuries the Federal Reserve bought, as advocated by Ron Paul, with money created out of thin-air. Bernanke and his fellow Board of Governors might react in a similar fashion to save the FED from going bankrupt, effectively putting a gun to the heads of every American.

Don't think for a moment these jackals will go down without a fight.

Cdad's picture

Don't think for a moment these jackals will go down without a fight.

Umm...fine.  Bring it.  Average Joe rejected these bankers' primary weapon 2 years ago, namely the equity market.  While they have been printing money short term with it, there is zero long term positive view of the market that these morons have broken.

I rather think you are right...this will come down to a fight between the public and criminal syndicate Wall Street bankers.  That is as it should be, all things considered.

SheepDog-One's picture

I'll fight these hockey helmet wearin 'tards no problem! Bring it!

Caviar Emptor's picture

Little problem with that plan that begins with a big letter C and rhymes with Sina. 

Default plus a draw down of money supply and economic unfurling would provoke a big response from our biggest creditors. Don't forget Middle East as well in the mix. 

Gun might be to the Fed Heads

MsCreant's picture

The stolen opening riff also doubles for the ice 9 theme here: Ice, Ice, Baybee!

kridkrid's picture

Stop, collaborate and listen... I still hate Queen for stealing Vanilla Ice's riff, but now that Freddie Mercury has moved on, I'm getting over it.

DaveyJones's picture

Vanilla, better teeth is not better talent

baby_BLYTHE's picture

Freddie Mercury is one of the all-time greatest front men.

Heavy Metal, today, would be nothing without his influence  

Subprime JD's picture

The POTUS will probably use a broad interpretation of the 14th amendment to raise the debt ceiling in order to avoid default making all this analysis a waste of time

JohnG's picture

That gives us a constitutional crisis and a fair chance of impeachment.  Not sure if that's the way for potus to go.  But then....

Bizzarro land territory here.

Subprime JD's picture

We are in the age of crisis. Debt crisis, energy crisis, constitutional crisis demographic crisis, food crisis etc etc. The years of spending, splurging, over consumption will lead to years of underconsumption, hardship and famine.

Mactheknife's picture

Three words from Jay Leno that would stop any impeachment process.. "President Joe Biden".

SheepDog-One's picture

Doesnt matter, it would bring great UNCERTAINTY and what do markets hate most of all?

Charley's picture

"There is no spoon."

Phillips Capital's picture


since money markets apparently have a risk of "breaking the buck" and getting their own "run on the bank", what do you advise as a "cash" holding in an IRA or 401k account? i read an article in reuters saying people are flocking into the 5 day treasuries... wtf. that is an idiotic idea if you asked me. should i just go into DBC and some other currency ETFs? 

Dr. No's picture

You have a 401K and/or IRA?  lol.  Just by having to ask the question should highlight the weakness of those retirement accounts.

OldPhart's picture

No shit, but a lot of us are locked in to them.  The only way to pull the funds is to quit.  Not gonna happen in this economy.

Phillips Capital's picture

Dr. No - This wasn't really a question about the account types, and I don't have the ability to change the account types since they are not mine.