Holders of U.S. government debt draw up contingency plans for default

Tue Oct 8, 2013 4:47pm EDT
 
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By Jamie McGeever

LONDON (Reuters) - No one expects it to happen, but everyone's making sure they're prepared for it.

Banks, funds and asset management firms holding U.S. government bonds are drawing up contingency plans on how to deal with potentially the most cataclysmic financial and economic event of all - a default by the United States.

The overwhelming consensus among all the firms contacted by Reuters is that Republicans and Democrats will come together at the 11th hour and avert disaster.

But the closer Washington's budget funding impasse gets to preventing the country's $16.7 trillion debt ceiling from being raised later this month, the more worried they are becoming.

A default by what has long been viewed as the world's safest credit would be such a seismic event that there appears to be no accepted play-book for its eventuality, despite the trillions of dollars of investments that would be affected.

"You can literally tear up every textbook you've ever read on finance. You could quite literally reverse that entire world view in the space of a day," said Ramin Nakisa, global asset allocation strategist at UBS.

"We are going to have to completely rethink the way we assess risk if U.S. Treasuries suddenly become a risky asset."

Fund managers will first have to communicate a strategy or contingency plan to their clients.   Continued...