It’s been warning for weeks United States may default on June 1 If there is no agreement in Congress on increasing the debt issuance limit, that would have serious implications for the national and global economy.
“First, let’s be clear: This is not our base case. And certainly We give very little chance of any such event happening. But you have to look at the potential consequences if the US government doesn’t extend the debt ceiling,” said Jack Jansiewicz, portfolio manager at Natixis IM Solutions.
According to the expert there are two results that are worth noting: a Technical non-compliance and a substantive non-compliance. “A technical default is defined as a prolonged period of non-payment of some or all of US financial liabilities, whereas a true default is one in which the government stops paying its obligations,” he said.
Clearly, the first possible scenario is if the credit limit is not increased. “We view this event as an extremely unlikely event that would clearly be an economic catastrophe. In that context, Almost dated treasury bills are likely to increase further, While long term returns will be tighter. Credit spreads are expected to widen, while the US dollar will depreciate relative to other safe-haven currencies such as the Japanese yen, euro and Swiss franc,” Janasiewicz predicted.
Las EM currencies are likely to weaken relative to the US Dollar While stocks will sell off in a risk-off move, US stocks will underperform other regional stocks in a risk-off environment.
These results are also likely to affect consumer sentiment and business confidence, which Will negatively impact short-term growth expectations.
“however, These reactions are likely to be somewhat temporary, Especially if we assume that politicians react after their feet are under fire and that the reaction of financial markets will easily prove to be a catalyst,” he concluded.