Debt disaster planning is the phrase on the lips of the powerful who run the financial institutions in the US. But they could be powerless to take any action.
So far the markets have not really wobbled but analysts and investors are now openly talking of a global stock market crash. Some fear a quick drop of 1,000 points in the Dow Jones Industrial average. No market would be insulated. Asia and Europe would be hit. It is unchartered territory.
“I understand that central banks and governments have been making contingency plans to try and mitigate the effects of a technical default, but we are really in unknown territory here. This really hasn’t happened in the US in living memory,” confirmed Mike Ingram market analyst with BGC Partners
Plunging stock markets can lead to economic recessions. In the worst case scenario it’s predicted the blow from the debt default would be so extreme there would be an almost immediate economic slowdown.
A one day drop in the markets is possible to reverse but a fall in the world’s stock markets and the dislocations which the default would cause would be impossible to reverse. “You will see global growth come to a halt,” was the chilling warning of a possible outcome by one analyst.
A collapse in money market funds is another possible result. Will there be enough cash to give money back to investors? If fund managers are forced to tell investors they can’t take out cash there could be a run on the banks, but major institutions could be forced to protect what they have.
The politicians posturing may not lead to any of these scenarios but it has been a bruising time for the dollar and questions remain as to the extent confidence in the currency has been hit.