During the final days of Lehman Brothers, Wall Street firms set up war rooms to chart the potential impact. Their scenarios didn’t forecast the contagion that quickly spread after the bankruptcy. “Nobody knows what would happen if there were a default because the reality is there’s never been even a technical default in the U.S.” “Everyone’s flying blind.” “We can’t even imagine all the things that might happen..." Some of the most worrying things which may happen within hours and days after a US default have to do with the systemic function of US treasuries for financial markets (and the role of the US Dollar as the reserve currency). - If US treasuries would be devalued (rated down to default level), investment banks cannot use them as collateral to borrow short-term money. Liquidity would dry up. - Banks would have to write down securities on their books, facing capital shortfalls, without the government able to bail them out this time around. - Stock markets will take a plunge. As financial markets are build on trust, chaos would be the most likely scenario. - Lack of consumer confidence and higher borrowing cost would drag the US economy into recession, pobably taking the world economy down with it.
Posted on: Wed, 09 Oct 2013 08:33:48 +0000
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