UPDATE: Reuters is reporting that the Federal Reserve is “actively preparing for the possibility that the United States could default…”
Many of us believed that the Obama Administration and the Republican House would have reached some sort of compromise on the debt ceiling by now. But the Aug. 2 deadline to raise the ceiling is just two weeks away and there is still no sign of an agreement, and few signs of optimism.
As was the case with the financial crisis that began in 2008, a default by the government would likely have a severe impact on global financial markets. The Treasury Department says so: “Failing to increase the debt limit would have catastrophic economic consequences. It would cause the government to default on its legal obligations — an unprecedented event in American history. That would precipitate another financial crisis and threaten the jobs and savings of everyday Americans — putting the United States right back in a deep economic hole, just as the country is recovering from the recent recession.”
While many in the financial industry anticipate a deal will be cut before the deadline, at least one budget expert is far less certain. Stan Collender, who has worked for House and Senate budget committees and is founder of the ‘”Capital Gains and Games” blog, told Reuters Insider there is less than a 50 percent chance that a debt agreement will be reached.
“I think we’re underestimating — maybe grossly underestimating — the ability of the Tea Party to stop anything from happening in the House,” Collender said. “We may have to have a couple of days of the government not having enough cash and adverse reaction [in the financial markets] to make things happen.”
Collender also told Reuters Insider: “You’ve got Wall Street saying, ‘Oh, they’re just huffing and puffing and in the end they’re going to make a deal.’ Well, No. 1, the fact that there has always been a deal in the past doesn’t mean there will be one this year. [With] Tea Party folks [and] hyper-partisanship, everything is completely different.
“No. 2, we really don’t know what the adverse market reaction might be since we’ve never been in this situation before. But when you’ve got all the ratings agencies saying they’re going to downgrade if this happens [and] when you’re already seeing credit default swaps on treasuries just zooming — in terms of the cost and the number of contracts out there — you can see that there are already some people who are starting to bet that there is going to be some type of default.”
Now it’s YOUR chance to weigh in, readers. Here are a couple of few questions for you to mull. One, is this issue front and center in your partnership meetings? Two, Is your firm/fund taking any steps to try to mitigate the risk of default?
As always, submit your comments below, and we’ll report back with a best-of here on peHUB and in Friday’s peHUB Wire.
For peHUB readers who need a primer on this issue, we’ve pulled together recent coverage from our colleagues at Reuters and Reuters Insider, as well as from the Capital Gains and Games blog:
Markets misjudge Tea Party: analyst (Reuters Insider video)
The Gang Of Six Deal Is Now The Gang Of 50 Or More Deal (Capital Gains and Games blog)