Debt Ceiling Fight Fallout: Banks to Cut U.S. Debt Exposure

More

Washington's wrangling over the debt ceiling may soon have some very real economic consequences. Banks are not amused, and they are preparing to reduce their Treasury buying in August if an agreement is not reached. This is a key point, because it shows that even if the U.S. does not default, "technical default" -- when the U.S. continues to pay interest on debt, but begins putting off other obligations due to too few tax revenues to cover everything it owes -- won't be a very pleasant situation for anyone involved.

Here are Michael Mackenzie and Aline van Duyn from the Financial Times reporting:

One strategy, which bank executives only agreed to discuss without attribution due to the political sensitivities related to discussing Treasury debt, is to have more cash on hand to put up as collateral against derivatives and other transactions, decreasing the financial system's reliance on Treasuries.

Currently, banks commonly use Treasuries as a source of collateral. If they switch to cash, then this will not be good for the government or the U.S. economy. First, it will mean that Treasury yields will begin to rises. That will make it even harder for the U.S. to afford its debt. Second, as the "risk free rate" that Treasuries provide begins to rise, other interest rates will follow. That will make financing more expensive for businesses and consumers, which should dampen economic activity.

And remember, all this occurs even if the U.S. never misses an interest payment -- Washington's prolonged bickering alone will accomplish this end.

Read the full story at the Financial Times.

Jump to comments
Presented by

Daniel Indiviglio was an associate editor at The Atlantic from 2009 through 2011. He is now the Washington, D.C.-based columnist for Reuters Breakingviews. He is also a 2011 Robert Novak Journalism Fellow through the Phillips Foundation. More

Indiviglio has also written for Forbes. Prior to becoming a journalist, he spent several years working as an investment banker and a consultant.
Get Today's Top Stories in Your Inbox (preview)

The Time JFK Called the Air Force to Complain About a 'Silly Bastard'

51 years ago, President John F. Kennedy made a very angry phone call.


Elsewhere on the web

Join the Discussion

After you comment, click Post. If you’re not already logged in you will be asked to log in or register. blog comments powered by Disqus

Video

Adventures in Legal Weed

Colorado is now well into its first year as the first state to legalize recreational marijuana. How's it going? James Hamblin visits Aspen.

Video

What Makes a Story Great?

The storytellers behind House of CardsandThis American Life reflect on the creative process.

Video

Tracing Sriracha's Origin to Thailand

Ever wonder how the wildly popular hot sauce got its name? It all started in Si Racha.

Video

Where Confiscated Wildlife Ends Up

A government facility outside of Denver houses more than a million products of the illegal wildlife trade, from tigers and bears to bald eagles.

Video

Is Wine Healthy?

James Hamblin prepares to impress his date with knowledge about the health benefits of wine.

Video

The World's Largest Balloon Festival

Nine days, more than 700 balloons, and a whole lot of hot air

Writers

Up
Down

More in Business

Just In