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Investors prepare for a debt deal

Marketplace Staff Jul 11, 2011
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JEREMY HOBSON: Now let’s get to the debt ceiling debate in Washington. The President will meet today with lawmakers in hopes of reaching a deal to raise the federal debt ceiling in exchange for trillions of dollars in deficit cutting. The Treasury Department says there must be a deal by August 2 to avoid a default.

For more, let’s bring in Julia Coronado, chief economist with investment bank BNP Paribas. She’s with us live from New York, as she is every Monday. Good morning.

JULIA CORONADO: Good morning.

HOBSON: Well Julia, how are investors preparing for the various possibilities here — either a deal that includes big cuts or a default?

CORONADO: Well, despite the fact that the negotiations seem to take a turn for the worst over the weekend, investors have plenty of other things on their plate to worry about with renewed concerns coming out of Europe. This time, concerns on Italy. So right now rightly or wrongly investors are still placing the probability of a default for the U.S. very low, and there’s no real evidence that they’re concerned about their Treasury holdings.

HOBSON: And if they are not concerned so much about the prospect of a default, then I guess the alternative would be trillions of dollars in deficit cutting. Isn’t that going to be something that would have a pretty big effect on the economy?

CORONADO: Certainly. And of course the terrible June employment report really highlighted the difficulties that these negotiators are facing. The trade offs are not good either way whether you raise taxes or whether you cut spending, either way that’s going to be a drag on an economy that’s already, or continues to struggle to find any consistent momentum. So the trade-offs aren’t good. And you know one way or another it’s just another headwind the U.S. economy’s going to have to absorb.

HOBSON: Julia Coronado, chief economist with the investment bank BNP Paribas, thanks as always.

CORONADO: My pleasure.

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