Government default would have far-reaching impact



By Dennis Seid

Daily Journal

Failing to raise the United States’ debt ceiling and causing a default would have a devastating impact on not only the U.S. economy, but also the global economy.

Scott Reed, CEO of Hardy Reed, a Tupelo-based investment advisory firm, said a potential default is far different from a government shutdown.

“Few people know that we’ve had 17 shutdowns since the Ford administration, and there was no significant impact. … they’ve really been non-events,” he said.

“But a default is a different deal. There’s no excuse for it. … and it’s a self-inflicted problem.”

The U.S. Treasury says it will run out of money if, by Oct. 17, Congress doesn’t agree to raise the $16.7 trillion cap on borrowing and allow it to issue more debt.

“The United States defaulting on its debt obligations has the potential to be catastrophic for both domestic and global capital markets and our nation’s credit reputation,” said Stacy W. Spearman, senior vice president and managing director of Renasant Wealth Management. “It could force the Treasury to pick and choose which bills to pay and would severely limit our country’s ability to make interest payments on our current debt, which could significantly impact interest rates. Short and simple, it would be very bad.”

The Treasury department says a default on bond payments could freeze global credit and spike borrowing costs.

The International Monetary Fund said a default “could have sizable adverse growth implications. A failure to promptly raise the debt ceiling also could adversely affect financial markets and economic activity, with spillovers to the rest of the world.

“A failure to raise the debt ceiling and potential default is a much broader scenario that has never happened in the history of our country and would be unwise and dangerous by most accounts,” said Mark Burleson, BancorpSouth’s northeast division president. “Beyond the economic and financial consequences, it is widely believed a default would impact the respect and admiration of the United States throughout the world.”

Reed said investors across the globe see the U.S. Treasury notes as the strongest in the world, and they are also the most liquid. They are among the most widely held assets in the world.

The government already has borrowed the money and needs the debt limit raised so it can continue paying on the interest.

“A default would have a dire affect all over the world,” Reed said. “We made a promise that we would make good on this debt, and you can’t suddenly decide you’re not going to pay.”

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