Here’s what could happen to the markets if the U.S. defaults: NPR

A default on US debt would cause stock and bond markets to crash, while eroding the US financial position around the world, analysts say.

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A default on US debt would cause stock and bond markets to crash, while eroding the US financial position around the world, analysts say.

Michael M. Santiago/Getty Images

The deadlines! The arm twist! The threat of default!

The United States may be days away from being able to pay its bills, but Wall Street has seen this movie before and the markets don’t seem bothered – yet.

“A Capitol Hill staffer compared this, the debt ceiling, to passing a kidney stone,” says Libby Cantrill, public policy manager at PIMCO, which manages some of the world’s largest bond funds. “We all know it will pass. It’s just a matter of how painful it will be.”

Everyone on Wall Street agrees that a default would be devastating to markets and the economy, and most investors believe lawmakers will eventually strike a deal like they have in the past.

“We think the stakes are too high for the two sides of the aisle not to really reconcile,” says Eric Freedman, chief investment officer at US Bank Asset Management Group.

Still, portfolio managers are still trying to figure out what might happen if lawmakers fail to strike a deal to raise or suspend the debt ceiling.

If this were to be the case, the impact would be severe. Here’s what to expect.

How bad would that be?

At the very least, there would be a huge sell-off on Wall Street. In its latest analysis, UBS indicates that the S&P 500 could fall by at least 20%.

But it’s hard to predict how badly things could turn out because the United States has never defaulted on its debt.

Analysts say the selloff could match or exceed a steep drop in September 2008, when the House of Representatives rejected a $700 billion bailout as the United States teetered on the edge of a global financial crisis.

Then-President George W. Bush stands with Federal Reserve Chairman Ben Bernanke (L), Treasury Secretary Henry Paulson and Securities and Exchange Commission Chairman Christopher Cox to discuss the economy at the White House in Washington, DC on September 19, 2008.

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Then-President George W. Bush stands with Federal Reserve Chairman Ben Bernanke (L), Treasury Secretary Henry Paulson and Securities and Exchange Commission Chairman Christopher Cox to discuss the economy at the White House in Washington, DC on September 19, 2008.

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The Dow Jones Industrial Average fell about 778 points that day, which was then the largest single-day point drop in index history.

A default would also send U.S. bond markets down sharply.

Treasury bonds have been considered one of the safest investments in the world. They are held by companies and countries around the world and used as collateral in all kinds of financial transactions. Failure by the federal government to pay the bondholders would have unimaginable consequences for the reputation of the United States.

A default would also weaken the US dollar, which is widely considered the world’s most important currency given the critical role it plays in the global economy.

“The world’s main reserve currency and the world’s ‘safe’ asset, which form the foundation of the global financial system, are suddenly much less safe and should be revalued,” UBS economists wrote in a May 19 note. to customers. “How this ripples through the system is unpredictable.”

Analysts also believe that rating agencies would lower the country’s credit rating.

Currently, the United States has a “AAA” rating from two of the three major credit agencies. The United States suffered a downgrade in 2011 from the other major ratings firm, when S&P Global Ratings downgraded the country’s rating to AA+ in a new round of debt talks under the president. Barack Obama.

How would market turmoil affect me?

Clearly, a sharp drop in stocks would hit retirement or other investment funds across the board. At the same time, bond markets determine all sorts of borrowing costs, which would rise sharply in the event of a US default.

That would still be bad news for anyone hoping to buy a home or car at a time when borrowing costs have already risen after the Federal Reserve aggressively raised interest rates to combat high inflation. Mortgage rates, for example, would climb even higher, as would credit card interest rates.

Federal Reserve Chairman Jerome Powell arrives to testify before the Senate Banking Committee on Capitol Hill in Washington, DC on March 7, 2023.

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Federal Reserve Chairman Jerome Powell arrives to testify before the Senate Banking Committee on Capitol Hill in Washington, DC on March 7, 2023.

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Inflation has cooled somewhat, but is still far from the Fed’s 2% target, and many economists expect the US to be heading into a recession. On top of that, there is still turmoil in the banking sector after the recent bankruptcies of three regional lenders.

“There are already significant pressures on the US economy,” says Seema Shah, senior global investment strategist at Principal Global Investments. “He can’t afford to have another major shock on his head.”

Shah echoes what policymakers have said that a government default would not only trigger a national recession, but also potentially another global financial crisis.

Is it gonna be like this?

As long as the United States has this limit on how much it can borrow, that seems likely.

Lawmakers voted more than 100 times to raise the debt ceiling, but debates over the debt ceiling have become increasingly heated and used as a political weapon.

In recent days, business leaders have become more engaged in the process.

On Thursday, Treasury Secretary Janet Yellen met with dozens of bank CEOs, while more than 100 executives wrote a letter to President Biden and congressional leaders, warning them of the consequences of inaction and encouraging them to raise the bar. debt ceiling.

“Action to end the looming debt crisis is needed now,” they wrote, noting that a default “would weaken our position in the global financial system.”

“We urge that an agreement be reached quickly so that the country can avoid this potentially devastating scenario.