Analysts said that any US default due to a failure to take the legal cap off its spending would turn financial markets upside-down, turning the world’s “risk-free rate” into junk overnight.
The dollar dropped 1.2 per cent against the euro and rallies in the Dow and Nasdaq were cut short as markets turned their attention to the gridlock in Washington that has reportedly seen President Barack Obama storm out of one meeting in a rage.
Despite some signs of progress, the Republican House majority leader Eric Cantor said that legislators are “still very far apart” from the White House on the deficit, and claimed that before walking out of negotiations Obama declared: “Don’t call my bluff. I’m going to the American people.”
Regulators and analysts both agree that even a temporary default involving several missed payments would be catastrophic, with Federal Reserve chair Ben Bernanke saying it would amount to “a major crisis”.
Moody’s warned: “There is a small but rising risk of a short-lived default… An actual default, regardless of duration, would fundamentally alter Moody’s assessment of the timeliness of future payments, and an AAA rating would likely no longer be appropriate.”
A note by analysts at Bank of America says that US Treasuries perform a “critical function” as a “safe haven” in money markets, with any stoppage in payments “likely to threaten this status permanently”.
Citigroup’s Steven Wieting, meanwhile, simply compares a US default to “suicide”. “It’s nearly unthinkable,” he says.