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Cover Story
A Shrug at Doomsday? Confident investors bank on Congress making a deal just in the nick of time
51%
Developments
The amount of Americans who say it is essential to raise the debt ceiling to avoid an economic crisis, according to a new Pew Research Center poll.
New York
52%
EVAN VUCCI (AP)
Warren Buffett likens it to a nuclear attack. Economists warn that government spending on programs like Social Security would plunge. The Treasury says the economy would slide into a recession worse than the last. Yet you wouldn’t know that a U.S. debt default could amount to a nightmare from the way many companies and investors are preparing for it: They aren’t. The assumption seems to be that in the end, Washington will find a way to avert a default. “Doomsday is nigh, and everyone shrugs,” said Nicholas Colas, chief market strategist at ConvergEx Group, an investment brokerage in New York. Brian Doe, a wealth adviser at Gratus Capital Management in Atlanta, has 35 clients who have entrusted him with $50 million for safekeeping. He isn’t losing sleep over a potential default. Neither are his clients, apparently. Not one has called him about the issue, he said. “I’ve not done anything,” he said. He puts the odds of default very low. “People in Washington are stupid but not that stupid.” Marcello Ahn, a fund manager in Seoul, South Korea, is more prepared, sort of. He doesn’t think the U.S. will default. But if it does, the economically sensitive stocks of shipbuilders and chemical companies will get hit especially hard. So he’s held off buying them. But he hasn’t sold a single stock or made any big moves to protect his portfolio. “We are not taking actions based on the worst-case scenario,” he said. That worse case is inching closer. The Treasury says it will run out of money to pay its bills if Congress doesn’t increase its borrowing author-
No Deal in the House?
Cause for Concern
Republican House Speaker John Boehner’s effort to end the shutdown appeared to be in serious doubt after a vote scheduled on the matter was postponed Tuesday night. The measure would raise the debt limit through Feb. 7, as in earlier proposals from both the House and Senate. But it would fund federal agencies only through Dec. 15, creating the threat of another shutdown just before Christmas if lawmakers fail to resolve a dispute over sequester spending cuts. Some conservatives expressed dismay at the plan, especially after the removal of a key concession to postpone the medical-device tax that is part of the new health-care law. (THE WASHINGTON POST )
The Fitch credit rating agency warned Tuesday that it is reviewing the U.S. government’s AAA credit rating for a possible downgrade, citing Thursday’s looming deadline. Fitch placed the U.S. credit rating on negative watch, a step that would precede an actual downgrade. Meanwhile, stocks tumbled in the final hour Tuesday as the House and Senate battled over measures to end the shutdown. All three major indexes closed near the day’s lows. (AP/ T WP)
“Nobody can imagine the consequences, so we don’t have any plans.” — AN OFFICIAL RESPONSE BY FRANCE’S TOTAL OIL COMPANY TO THE POTENTIAL FOR A U.S. DEFAULT
ity by Thursday. That includes paying interest and principal on already issued U.S. Treasurys, considered the most secure financial bet in the world. Treasurys are used as collateral in trillions of dollars of loans roll-
ing over every day. They are also the standard against which the riskiness of stocks and bonds are measured. A default would cast doubt on the value of those assets and throw the global financial system into chaos. Which is a key reason many seem unready for it: Why bother if you can’t really protect yourself? Still, the business world isn’t entirely unprepared. Big U.S. companies have been hoarding cash. And financial regulators, major banks and mutual funds have moved to shore up their defenses, too. Cash may be one of the few failsafe options. Spooked by the financial crisis, big U.S. companies in the S&P
500 stock index have piled up a record $1.1 trillion of cash. They’ve drawn criticism for not using it to expand or hire. But the move may end up being wise. Many now have enough to pay their bills for several months in a pinch, letting them avoid the panicked lenders that refused them money in the financial crisis. The cash cushion may help explain why U.S. stocks haven’t sold off more as default approaches. “Investors know that for better or worse, most companies have become their own banks,” said Colas, the strategist at ConvergEx. “In a way, we’ve been preparing for [default] since the financial crisis.” BERNARD CONDON (AP)
The amount of Republicans who say the country can go past Thursday’s deadline without major economic problems. There is a huge partisan split on this question, with 37 percent of Republicans and 67 percent of Democrats believing there would be an economic crisis.
‘default deniers’ The term White House press secretary Jay Carney gave such naysayers Tuesday. The White House has warned of a default if the debt-ceiling deadline isn’t met, but some Republicans say the government can still pay interest on its loans even if the debt ceiling isn’t raised — something they argue wouldn’t technically constitute a “default.” (THE WASHINGTON POST )