WASHINGTON, May 9 (Reuters) – Wall Street executives, who have advised the US Treasury Department’s debt operations for the past 25 years, warned on Tuesday they were “deeply concerned” by the impasse on the debt ceiling that markets are struggling to overcome a US default.
The 18 current and former chairs and vice-chairs of the Treasury Borrowing Advisory Committee (TBAC) since 1998 said in a letter to Treasury Secretary Janet Yellen: “Any delay in any payment of interest or principal by the Treasury would be an event of seismic proportions, not just for the financial markets, but also for the real economy.”
The advisers said the standoff between Republicans and Democrats in Congress and the White House has already raised taxpayers’ borrowing costs through weak Treasury auctions and high yields on short-term Treasury bills, while rating agencies are already issuing analysis of potential US credit rating downgrades.
“There will be a direct impact on any issuer whose credit depends on US government support,” such as mortgage lenders Fannie Mae and Freddie Mac, municipal issuers or Amtrak and the Tennessee Valley Authority. “A downgrade or default by the US government would send the entire real economy soaring.”
They said the Treasury market’s role as the backbone of the entire financial system would be challenged, leaving the debt market without a benchmark pricing firm and causing investors to withdraw from the bond and equity markets.
“The validity of Treasuries as an acceptable collateral for margin would be called into question, with devastating consequences for interest rate derivatives, commodities and mortgage markets,” the Chairmen wrote, led by current TBAC Chair Beth Hammack of Goldman Sachs (GS.N). and Vice Chair Deirdre Dunn of Citigroup (CN).
Her letter was distributed after President Joe Biden met with Republican House Speaker Kevin McCarthy at the White House, with no sign of softening their positions, though they said they were willing to continue talks.
After the banking turmoil in March, the debate about raising the debt limit was “reckless and irresponsible,” said the advisors.
A lengthy negotiation would have short-term costs, but a default is an “unthinkable” event, executives said. “The magnitude of the adverse consequences of a protracted negotiation or default is unquantifiable, with both the American taxpayer and the U.S. economy bearing the burden,” they wrote.
Reporting by David Lawder; Edited by Sandra Painter
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