Wall Street banks and asset managers have been bracing for the consequences of a potential default as negotiations over raising the $31.4 trillion debt ceiling for the United States government are nearing their conclusion.
A recent preparation for such a disaster was made by the financial sector in September 2021. But this time, a senior industry insider claimed, the narrow window for finding a solution has bankers on edge.
U.S. Treasury Secretary Janet Yellen reiterated the ultimatum on Sunday. The Treasury Department has warned that the federal government may not be able to pay all of its bills by June 1, which is less than two weeks away.
Jane Fraser, CEO of Citigroup (C.N), stated that this debt ceiling battle is “more worrying” than past ones. Jamie Dimon, CEO of JPMorgan Chase & CO (JPM.N), stated that the bank is holding weekly meetings to discuss the consequences.
WHAT WOULD TAKE PLACE SHOULD THE USA FAIL?
It is difficult to properly assess the harm that a default would cause because U.S. government bonds support the whole global financial system, but executives anticipate extreme volatility in the equity, debt, and other markets.
It would be very difficult to buy and sell Treasury positions on the secondary market.
Wall Street executives who advised the Treasury’s debt operations cautioned that the instability in the Treasury market would swiftly spread to the derivative, mortgage, and commodity markets because investors would doubt the legitimacy of the extensively used Treasuries as collateral for trades and loans. Analysts said that financial institutions should ask counterparties to replace the bonds impacted by late payments.
Even a brief overdraft could trigger an increase in interest rates, a drop in stock prices, and covenant violations in loan agreements and leverage contracts.