Markets unrattled by debt ceiling debate in Congress

Marketplace Staff Jul 5, 2011
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Markets unrattled by debt ceiling debate in Congress

Marketplace Staff Jul 5, 2011
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ADRIENE HILL: In D.C., lawmakers are back at it. They’re trying to work out a compromise that would allow the government to raise the debt ceiling.

How nervous are investors?

For more, we go to Juli Niemann, an analyst at Smith Moore and Company in St. Louis. She joins us every Tuesday.

Good morning Julie.

JULI NIEMANN: Morning Adriene.

HILL: So the markets had a great week last week, the best in two years. Why aren’t investors reacting to the chance the US could default?

NIEMANN: Oh the market says this is really all theater, while we do have Congressman who seem to love apocalyptic outcomes. We have rising corporate profits, restructuring Greek debt – call it anything but default. The market really sees only Draconian alternatives if you don’t raise the debt ceiling.

And there are alternatives out there. Ron Paul plan: the Fed cancels all of the treasuries they’ve bought with quantitative easing. They own it anyway, why pay themselves? That would save them $1.5 trillion.

The McCain plan: you’ve got a mini debt ceiling, move the debate to the 2012 campaign. That’s the season for some real fun then.

And then the president can always invoke the 14th amendment, which relies on the validity of the public debt.

HILL: So investors aren’t that worried now. How will we know if that changes. What specific things can we look for.

NIEMANN: Well if it does happen then it’s “Katy bar the door”, because you will have financial hysteria. The financials — meaning the banks, the insurance companies, the brokerage firms — you’ll see those prices plunge. In fact, that’s the only reason they rose this week, because of the confidence. Treasuries: Treasury prices will plunge as interest rates skyrocket.

And then credit default swaps, which are insurance policies on debt instruments, will plunge. Trading out there, there are so many of them, the ability of them to settle up is not there. Now, that’s gonna be a real financial collapse.

So the unthinkable, if it happens, that’s what it would be.

HILL: Juli Niemann is an analyst at Smith Moore and Company in St. Louis. Thanks Julie.

NIEMANN: You bet.

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