Thinking the unthinkable on the U.S. debt ceiling

Just days ahead of the expiry of the deadline for lifting the U.S. debt ceiling Business RT spoke with Louise Cooper, Markets Analyst at BGC Partners about the possible implications for the global financial system.

RT:  Let's say we come to work Monday morning and the U.S. hasn't raised the debt ceiling. What sort of a mess would there be?

LC:“I find it quite interesting that, to my mind, there has been a lot of complacency by everybody in financial markets.  As I walk around the trading floor, speak to economists and analysts that I used to work with, and colleagues and friends, they all say ‘Do not worry Louise, a deal will be done!’  Well I think we are now getting to the stage where people are starting to be concerned that a deal will not be done.  So today we see on the front page of the Financial Times a lot of economists and strategists and analysts start to be quite vocal in their criticism of Washington, saying ‘come on guys it is time to sort it out.’ I think a lot of nervousness, we are all waiting for the last minute deal. I think markets will give them until Monday or Tuesday, but I think it could turn very quickly – you could get a run on confidence very quickly.” 

RT:  How heavily is sentiment being dominated by sovereign debt in Europe and the U.S. as some corporate earnings figures have been good?

LC: “As far as investors are concerned, yes we are interested in the earnings, yes Vodafone today has returned over 3 billion dollars to its shareholders in the UK.  Yes we have had better figures from BSkyB, and yes we do talk about these things.  But really the big picture, it’s all about the big picture, about the macro situation, it’s all about the Eurozone’s highly indebted periphery countries, it’s all about the crisis in the States, and that is truly where investors are focusing their thoughts.  So it is dominated really at the moment by the macro situation.”       

RT:  Even if the U.S. does cobble together a deal, will the problem re-emerge when it has to raise the debt ceiling again?

LC:“Well we seem to be having the fun of kicking the can down the road in Europe, and maybe the Americans are discovering the joy of that particular game as well.  Because, unlike many countries, they have this mandated legal limit to the amount of debt the American government can take on.  It doesn’t exist in many other places around the world.  And so if it is just a short term solution then we will be coming back and we will be revisiting this.  And I think what is concerning now, a lot of players, even if we do get that short term fix, is the damage that it’s going to do to the American economy, which isn’t in great shape anyway, we are expecting 2Q GDP figures out in the next two hours actually, in two hours time, and I think the concern is the damage that this huge uncertainty is doing to consumer confidence in the States, but also to business confidence as well.  And I think that the markets will look very closely at today’s economic GDP figures.”

RT:  What should the pessimistic investor do that sees downgrades and defaults in the US and Europe?

LC: “I don’t know, maybe you should hide under your duvet.  I am not sure, it is a wild and crazy world out there.  You have seen gold very strong, you have seen the Swiss Franc very strong, you have seen German Bunds, German government debt, a lot of buyers of German government debt still. Or you could just put your money under your mattress.  To be honest, where is safe nowadays? U.S. Treasuries was deemed safe – that was supposed to be the ultimate risk free asset.  Many people would say that American debt is no longer the safest place to put your money.”  

RT:  Russia has an excellent budget position, does that make it attractive in the current climate?

LC:  “I think there are some big serious questions about Russia, really, in terms of the rule of law, rule of business law, deep seated corruption.  I mean, to be fair, a lot of oligarchs take their billions out of the country.  Yes it benefits an awful lot from high oil prices, and we have had high oil prices for many years, but I think there is deep structural reform needs to happen to the Russian economy, before everyone starts piling their money into Russia rather than U.S. T-Bills.”