US default would be devastating for markets

ForexNewsNow | Published on July 18, 2011 at 3:19 am

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The prospect of the US defaulting on its debt obligations has not gravely impacted the financial markets since it appears that many observers are still certain that a solution will be found to avoid a default.

Despite Moody’s declaration that it was putting US government bonds “on review,” last week’s three rounds of bond issuances were successful. This is of little importance however since the maximum allowable debt ceiling authorized by the United States will be met Aug. 2 and, if it’s not raised, the government will no longer have the means to repay its creditors.

“Markets do not believe in default, they think that Congress will act in time for the Treasury to meet its deadlines,” noted Chris Turner from ING.

Moreover, even the rating agencies do not really believe that US bond holders are at risk of losing their investment. “This type of default should be temporary and so the loss for investors would be modest,”  Moody’s remarked. Standard & Poor’s also observed that “the risk of default on U.S. bonds is low.”

JPMorgan head Jamie Dimon has urged the U.S. to react. “No one can say that a default would not be a catastrophe,” he warned.

Chinese Foreign Minister Yang Jiechi said he hoped Washington would take responsible decisions in order to protect the interest of investors. China, which is the largest foreign holder of U.S. debt with approximately $1200 billion, is looking to avoid any default in order to secure its assets.


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