Talk of US Debt Default Unsettles Markets
Analysts warn that a debt default would be disastrous as it would harm the credit rating of the United States. It may also result in an increase in interest rates and have a negative impact on stock and bond prices, as well as damaging the value of the US dollar on international currency markets. Moreover, the damage to consumer confidence may have a negative impact on the economy. In a letter to Congress in September, current Treasury secretary Jacob Lew reportedly pointed out that the debt limit impasse that took place in 2011 “caused significant harm to the economy and an unheard of downgrade to the credit rating of the US.” Former treasury secretary Henry Paulson reportedly stated that in his view it would be “unthinkable that Congress wouldn’t live up to (its) commitment to make good on past spending commitments and obligations”.
Analysts note that investors who have confidence that Congress will find a last minute resolution are likely to see stocks, bonds and the US dollar rise in value, while those who anticipate a default may choose to shift money from stocks into bank deposits, or invest in funds such as the RYURX – Rydex Inverse S&P 500 Strategy fund – which rise when stocks fall.