As the August 2 deadline for raising the U.S. debt ceiling approaches, many mainstream investors seem to lack contingency plans to address the impact of a U.S. debt default.
Reuters points out that fund managers surveyed by Bank of America Merrill Lynch this month did not even list the risk of a U.S. default among the top five tail risks, reflecting investors' calm attitude.
These analysts are almost certain that neither Republicans nor Democrats will allow a U.S. debt default to occur. The reason is that politicians across the spectrum in the U.S. understand that the economy, which has just recovered from a financial crisis, cannot bear such artificially created turmoil. Under the political system of the United States, this issue will be satisfactorily resolved through compromise among the parties involved. Moreover, as a major issuer of the world's reserve currency, a default on U.S. debt would have unimaginable repercussions for the global economy. As many experts have stated, it would lead to a financial tsunami far greater than the 2008 financial crisis.
On the other hand, even if the U.S. were to lose its AAA rating, the lack of alternative investment options could prompt investors to stick with U.S. Treasuries, thereby mitigating the impact on financial markets. For this reason, currently, except for a few firms such as Morgan Stanley and the Chicago Mercantile Exchange, mainstream investors have not developed contingency plans for a U.S. debt default.
