Markets may tank if US defaults, says strategist
GLOBAL financial markets would react violently and ‘‘tank big time’’ if the United States defaulted on its debts, but the chances of that happening are very low, according fund managers AMP Capital.
‘‘It could be catastrophic,’’ according to AMP Capital head of investment strategy Keith Poore, but it was a ‘‘low probability event’’. The US debt ceiling needs to be raised by tomorrow.
‘‘We don’t think US politicians are reckless enough to drive themselves off a cliff,’’ Poore said in Wellington yesterday.
The US was expected to raise its government debt ceiling ‘‘very soon’’. But it was possible the deal would be short-term and the present uncertainty could come around again by Christmas or early next year, AMP said.
World shares rose yesterday on expectations of an imminent deal to reopen the US Government and avert a possible debt default, though the squabbling in Washington kept markets on edge ahead of tomorrow’s deadline.
‘‘It (default) could be catastrophic and the market reaction in the short term would be violent. Markets would tank big time,’’ Poore said. While shares would fall heavily, ironically there might be a flight to the ‘‘safety’’ of US government bonds as seen in 2011 when bond yields actually went down.
If there was a debt default there would be a violent reaction on both ‘‘Wall St’’ and Main St in the US and politicians would come under extreme pressure so any potential default would be short-lived.
But such a crisis would affect trade around the world and in the short term would like see the New Zealand dollar fall.
AMP NZ chief economist Bevan Graham said a debt default in the US would mean it would have to live ‘‘within its means’’ very quickly, when it now has a budget deficit of 4 per cent of GDP.
‘‘They would have to close that deficit to zero . . . that means a far more dramatic shutdown of the government that we are seeing now,’’ Graham said, such as social welfare payments being delayed, with cuts to medical benefits.
While there would likely be a deal in the next day or so ‘‘the key question is how long is that deal?’’ Graham said.
The ongoing uncertainty and concern and that would hurt business and consumer confidence and the latent recovery in the US could take ‘‘a backward step’’.
Business would not make investment decisions and new job growth would not happen as much and business investment was critical. That could see the US economy just ‘‘muddle along’’ instead.
Meanwhile, global and New Zealand shares posted strong returns in the September quarter, despite plenty of international worries in the past three months, according to AMP Capital.
World shares rose on the back of a pickup in economic growth indicators and better earnings, with market returns up 6.4 per cent in the quarter.