Hundreds of banks, hedge funds and investment managers could soon begin holding multiple daily conference calls to handle the fallout from a possible U.S. debt default, activating a “break-glass-in-case-of-emergency” playbook that has never been tried.
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That strategy could allow the government to dodge a default. But rating agencies would probably downgrade the United States’ creditworthiness, a move that would raise the government’s borrowing costs and boost the interest rates that consumers pay on credit card balances, auto loans and mortgages.placed the United States’ “AAA” standing on negative watch, adding that a failure to reach a deal before June 1 “would be unlikely to be consistent with a ‘AAA’ rating.
If a default occurs, Washington and Wall Street would aim to operate as close to business-as-usual as possible. Getting this untested system to work “would entail significant operational difficulties and require manual intervention for nearly all market participants,” concluded a December 2021 paper by the Treasury Market Practices Group, an industry advisory body. If Treasury was unable to provide advance notification of a missed payment, the affected security would be frozen on Fedwire, potentially clogging trading in the world’s most important market.
If that return is no longer guaranteed — because the government chooses not to make a scheduled payment — Treasurys’ value no longer would be known for certain. And if investors were unsure how much Treasurys were worth, they would be unsure how much everything else is worth, too.
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