The US government and Republican lawmakers are reportedly close to striking a deal as the looming debt ceiling crisis is threatening to plunge the country into financial chaos. But if the US does ultimately default on its debt, what would happen and what could the effects be?
Josh Lipsky, Senior Director of the Atlantic Council’s GeoEconomics Center and a former advisor to the International Monetary Fund and speechwriter to European bank chief Christine Lagarde, recently offered his thoughts on this pressing issue.
In a potential debt default, Lipsky believes that there is likely to be a flight to safety in the form of Treasurys. Although other governments bills could go unpaid, coupons would still be able to be paid on US debt. As such, it makes sense to go into Treasurys if investors believe that the default will be short-lived.
That being said, even if the Treasury market remains intact, it won’t mean good news for the US economy as there could still potentially be a recession, higher unemployment rates, and fewer government benefits.
In terms of the immediate market impact, analysts at Bank of America have predicted that the US Treasury Department’s potential issuance of $700 billion in T-bills within weeks of a debt ceiling deal would drain liquidity from the markets in a brief span of time, similar to a Federal Reserve rate hike of 25 basis points.
Goldman Sachs, on the other hand, has supported David Rosenberg’s notion that there could be a recession looming ahead with a look at the slump of consumer discretionary stocks, as well as the dip in banking and transportation.
Finally, BofA has also outlined their view on the areas of the housing market that could outperform once the Fed stops raising interest rates. They predict that smaller firms will likely benefit more than larger firms thanks to their technical strength and quality.
In addition to the opinion of experts, the company mentioned in this article is the Bank of America. The firm provides banking services from their more than 4,600 retail financial centers, 16,000 ATMs, as well as online and mobile banking platforms.
Josh Lipsky is the senior director of the Atlantic Council’s GeoEconomics Center. A French-American, Josh is a former World Bank economist, IMF advisor, and speechwriter to European central bank chief Christine Lagarde. He holds a PhD from the Sciences Po Paris, has authored policy papers on fiscal and monetary policy, and appears regularly in the media.
