US braces for the worst as default, rating loss loom

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July 25 2011 at 05:00am

Emily Flitter and Jennifer Ablan New York

BUSINESSES in the US, from Wall Street banks to major industrial corporations, are preparing contingency plans for a pair of once-unthinkable events: the US defaulting on its debt and the loss of the nation’s top AAA credit rating.

While most bankers, investors and executives cannot imagine that politicians could be reckless enough to let the government run out of money to pay its bills on August 2, they cannot guarantee that the game of chicken that has been played in recent weeks would not go awfully wrong.

Legislators and President Barack Obama need to agree to increase the $14.3 trillion legal borrowing limit by that date to avert a default, but the decision is being held hostage to arguments between Republicans and Democrats about how to cut the country’s budget deficit.

On Friday, the prospects of an agreement dimmed when top US Republican, House of Representatives Speaker John Boehner, broke off talks with Obama, saying they had become futile because Obama was demanding a tax increase.

It means that, just as companies formulated expensive backup Y2K (millenium bug) plans in case computer systems could not recognise the date January 1, 2000, investors are devising ways to cope with financial markets pandemonium if the US government runs out of cash.

Ringing in their ears are dire warnings from the guardians of the nation’s financial well-being as Federal Reserve chairman Ben Bernanke said last week that a default would be “calamitous”.

In some cases, bankers are delaying their summer holidays, while companies are making sure they have plenty of access to cash, and investors are being told to hedge their portfolios, with gold one favoured asset for that.

“We’ve to some degree taken on a defensive posture. We are now at 10 percent cash with so much uncertainty. In April, we were at 2 percent,” said Fifth Third Asset Management chief investment officer Keith Wirtz.

At Morgan Stanley it is all hands on deck at a time when many traders might otherwise be expected to be on holiday.

“I can tell you that we don’t have any empty seats on the floor,” said Morgan Stanley global head of interest rate strategy Jim Caron.

Many are dogged by flashbacks to the financial chaos in September 2008 after the Lehman Brothers collapse, and the failure of legislators to pass legislation to authorise a government bailout of the banks of $700 billion, which sent markets into a tailspin.

General Electric, which was hit badly by those events, has boosted its cash holdings and cut its long-term debt in the past three years to put it in a better position to withstand similar events. The largest US conglomerate now holds $91bn in cash on its books and has $40bn in short-term debt, compared with the $16bn in cash and $90bn in short-term debt it had three years ago.

The second previously implausible event – a one-notch downgrade in the US government’s credit rating – is possible even if the ceiling is raised in the next 11 days. – Reuters

http://www.iol.co.za/business/business-news/us-braces-for-the-worst-as-default-rating-loss-loom-1.1104861

[Obama 2012 1,714]

*yawn*

All they have to do is say "pay our bills."

It's really that simple. Don't need to raise the debt ceiling for that.

Prioritize paying what needs to be paid and cut the rest.

It's really not hard.

The only thing that makes it hard is politics.

[luckytxn 2,265]

It is like watch idiots constantly. So friggin simple to just don't spend more than you take in. Less revenue then spend less. It is like they can't understand this very basic concept. They have to understand the harm they have caused and will cause again don't they?