Experts begin to consider impact of US deal failure

29th July 2011

Here Financial Times journalist Gillian Tett writing on fund supermarket Funds Network asks some very relevant questions of the US Treasury and Federal Reserve if markets cease up in the next few weeks.

Presumably to date, we haven't heard about what will happen because the two bodies do not want to talk up a crisis in any detail.

Here are a couple of questions however.

Tett provides some of the answers in her article too which is definitely worth a look.

The Economist's Buttonwood blog asks what would be the consequence of even a notional default?

It notes:"The IMF has talked of a global recession if there was a loss of confidence in US solvency although it's not clear that a failure to roll over debt for a few days would qualify for that description.

"Having seen what happened with Lehman's default, the main worry would be a freeze in the markets. Take the finances of banks, for example. Many use Treasury bonds as the risk-free asset for capital purposes."

"And what about money-market funds? Having been burned by the credit crunch, many have opted for the safe haven of US Treasury bills. Perhaps they could roll over those bills into some form of IOU from the government. But if investors demanded their money back at a time when Treasury bills were illiquid, money-market funds might be forced to suspend resumptions or "break the buck". Then there is the repo market, widely used by financial institutions to raise money; Treasury securities are used as collateral for such borrowing."

Here the the New York Times suggests some creative accounting means there may be a few more days – actually specifically until the 10th.

It writes: "Thanks to an inflow of tax payments and manoeuvering by the Treasury Department, the government can probably continue to pay all of its bills for several days after Aug. 2, providing potentially critical breathing room for Congress to raise the debt ceiling, according to estimates by several Wall Street banks and a Washington research organisation."

So after Tuesday perhaps we have eight more days of arguing, unless the ratings agencies run of patience in the meantime.

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