Wall Street makes fallback plans to tackle debt default
Lawmakers in Washington are racing to reach a deal to save the US from defaulting on its debt, but on Wall Street, financial players are devising doomsday plans in case the clock runs out.business Updated: Jul 21, 2011 21:00 IST
Lawmakers in Washington are racing to reach a deal to save the US from defaulting on its debt, but on Wall Street, financial players are devising doomsday plans in case the clock runs out.
These companies are taking steps to reduce the risk of holding Treasury bonds or angling for ways to make profits from any possible upheaval. And even if a deal is reached in Washington, some in the industry fear that the dickering has already harmed the country’s market credibility.
On Wall Street, Treasuries function like a currency, and investors often use these bonds as security deposits in their trading in the markets. Now, banks are sifting through their holdings and customers’ holdings to determine if these security deposits will retain their value. In addition, mutual funds — which own billions of dollars in Treasuries — are working on presentations to persuade their boards that they can hold the bonds even if government debt is downgraded. Hedge funds are stockpiling cash so they can buy up US debt if other investors flee.
The rating agencies, which control the fateful decision of whether the nation deserves to have its credit standing downgraded, are surveying other entities that would be affected by a US default — such as insurance companies and states.
All these contingency plans hinge on the pivotal date of August 2, when the Obama administration has said it will no longer be able to finance obligations without raising the $14.3-trillion cap on borrowing.