Monday, October 25, 2021

Wall Street firms dash plans as debt limit talks go to the wire

WASHINGTON – Wall Street firms are sounding alarm bells and dusting off contingency plans as fears grow that Congress may fail to reach an agreement to raise the country’s debt limit in a timely manner, officials said.

Federal government funding is due to expire on Thursday and the right to borrow is due to expire on October 18.

The government’s failure to meet its budget deficit and raise the legal limit on how much money it can borrow to meet debt obligations, currently set at $28.4 trillion, could send a shockwave to global markets.

“If there is some sort of failure to pay Treasury securities, we honestly don’t know what will happen,” said Rob Tomey, managing director and associate general counsel for Capital Markets at the Securities Industry and Financial Markets Association (SIFMA). .

“Certainly, you can expect significant volatility, and the market needs to be prepared for that.”

JPMorgan Chase & Co CEO Jamie Dimon told Reuters on Tuesday that the bank has begun preparations for the prospect of a US default, a “potentially catastrophic” event, though he said he expects lawmakers to last minute. will reach the deal. However, some analysts say the uncertainty is spreading between a one-month Treasury bill and a three-month Treasury bill, which is considered less risky in default. One-month bills currently fetch 0.07 percent, compared to 0.04 percent for three-month bills. At the beginning of the year, both gave returns of around 0.08 per cent.

The past debt limit crises have caused a stir in global markets, even after they are resolved. The now-infamous 2011 impasse over the ceiling prompted S&P Global Ratings to downgrade US sovereign debt for the first time, taking $2.4 trillion off US stocks. In 2017 talks were again wired, albeit with less disruption.

printed $20 bill
The $20 bills were partially printed at the Bureau of Engraving and Printing in Washington on October 23, 2006. (Jim Young/Reuters file photo)

Investment bank Goldman Sachs this month described the impasse as “the riskiest loan-forward deadline in a decade”.

Eric Pan, CEO of the Investment Company Institute (ICI), a trade group representing the world’s largest fund managers, said his members were concerned about the financial implications of a potential US default for savers globally.

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“ICI has made it clear in our conversation with Capitol Hill that failing to raise the debt limit will not only hurt our capital markets, but it will negatively impact their constituents, regardless of income or political affiliation. will be significantly affected.”

two scenarios

Given how badly exposed Wall Street banks, dealers and investors will be, they have to be prepared for this possibility, even as they expect the crisis to resolve.

“We’ve been through this many times,” Tommy said, adding that the group reiterated its previous plans for a scenario in which the Treasury is unable to pay debt due.

“We’re dusting off work like this with our members to make sure everyone’s on the same page.”

SIFMA is working on two scenarios. More likely, the Treasury will have to buy time to pay back bondholders before payment that it will roll over those maturing securities for another day. This will allow the market to continue to function even when there is widespread volatility.

SIFMA said the other, much less likely scenario, would allow Treasury bonds to mature, which would be more disruptive because the unpaid bonds would still need to be settled, but would no longer exist in the US Federal Reserve’s system.

In general, the purpose of these plans is to ensure that firms have sufficient technical capacity, personnel and cash to handle high trading volumes to ensure that the market continues to function.

The Treasury Market Practice Group, a group of bond dealers convened by the New York Fed, also plans to trade in defaulted treasuries, which were reviewed earlier this year.

Internally, individual banks are also planning.

Dimon said JPMorgan had begun scenario-planning how a default would affect the repo and money markets, its capital ratio and rating agencies’ response. The bank has started combing through their customer contracts to understand how they will respond.

“You have to check the contracts to try to predict it,” he said. “It’s a lot of work.”

Reuters

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This News Originally From – The Epoch Times

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