While the chances of a US debt default diminish, risks remain for the global banking system and financial markets.
“An actual default would be a disaster,” JPMorgan CEO Jamie Dimon told FOX Business from Grady Trimble on Capitol Hill Wednesday.
While Dimon added that a default is unlikely, others say that US markets and the economy still face uncertainty.
“We’re just days away from default, there’s no deal and that sucks,” Dennis Kelleher, CEO of Better Markets, told FOX Business.
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“Basically, every financial instrument in the world is priced at the risk free rate of US debt. The only reason U.S. debt is the cornerstone of the global financial economy and is risk-free is because the U.S. has never defaulted.”
Keeler pointed to 2011 when an agreement was reached, but the chaos continued.
“In 2011, there was no default, but political brinkmanship prompted one of the rating agencies to downgrade the US debt rating,” Kelleher added, noting that the economy is also dealing with rate hikes from the Federal Reserve.
The events of 2011 are also brought up in Schwab’s Market Perspective on May 12 by strategists Liz Ann Saunders, Cathy Jones and Jeffrey Kleintop.
“A default could send risky short-term returns higher, while riskier assets and the dollar are likely to decline,” the team wrote. “This is the scenario that played out in the 2011 debt-ceiling battle, which led to a downgrade of the US federal government’s credit rating by several rating agencies, including Standard & Poor’s, below AAA for the first time ever.”
While the S&P 500’s 8% advance this year seems to show little concern about defaults, there are similar trading patterns to 2011 based on the Charles Schwab-Bloomberg chart.
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Earlier this week, Treasury Secretary Janet Yellen, in another letter, urged House Speaker Kevin McCarthy and lawmakers to move quickly.
“We have learned from previous debt limit impasses that waiting until the last minute to suspend or increase a debt limit can cause serious harm to business and consumer confidence, raise short-term borrowing costs for taxpayers and negatively affect the United States’ credit rating,” Yellen writes.
“We have learned from previous debt limit impasses that waiting until the last minute to suspend or increase a debt limit can cause serious damage to business and consumer confidence, raise short-term borrowing costs for taxpayers and negatively affect the United States’ credit rating.”
Yellen also noted that damage has already been done.
“We have already seen the Treasury’s borrowing costs increase dramatically for securities maturing in early June,” she warned.
|KRE||SPDR SERIES TRUST S&P REGIONAL BKG ETF||39.68||+2.72||+7.36%|
|JPM||JPMORGAN CHASE & CO., LTD.||138.45||+4.13||+3.07%|
|WFC||Wells Fargo and Company||40.46||+2.07||+5.39%|
|buck||Bank of America Corp.||28.57||+1.21||+4.42%|
Lawmakers appear to be closer together in terms of avoiding default. The SPDR S&P Regional Banking Index (KRE) rose more than 7% on Wednesday, its biggest one-day percentage gain since January 2021.
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The government may not be able to pay all of its obligations as early as June 1 if no deal is reached.
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