One truth has so far spared world markets from a massive, collective sell-off: Most big investors see it as unlikely that the United States will actually renege on its obligations with the holders of U.S. Treasury bonds.
But economists warn that a psychological barrier may be approaching in the coming days that could shatter faith in Treasurys, long seen as the world’s most stable investment. Crossing that threshold, they say, risks sparking the kind of panic that sent world markets into a tailspin three years ago.
“This would be bigger than September 2008,” Simon Johnson, economic analyst at the Peterson Institute in Washington, said of a possible U.S. default. “You could be talking about another world recession.”
In the event of even a limited default, the world economy would suddenly be plunged “back into uncharted territory,” said Thomas Mayer, chief economist at Deutsche Bank in Frankfurt.
“You’d have to presume a severe stock market sell-off globally at a time when there are already signs of a global slowdown,” he said. “The only nations that would not feel such an event are those not integrated in the global financial system. You’d have to be North Korea.”
For now, the markets are standing firm. U.S., Asian and European markets were all down Monday, but by relatively small margins. Asian markets edged slightly higher in morning trading Tuesday. “I think the markets are handling this in a very, very calm manner,” said Fred Dickson, chief investment strategist at D.A. Davidson in Portland, Ore.
But the International Monetary Fund warned Monday that may not last, calling for an urgent solution to the political impasse in Washington so the markets do not lose confidence in U.S. debt.
The IMF’s board warned that a default would “have significant global repercussions, given the central role of U.S. Treasury bonds in world financial markets.”
The timing of a U.S. debt crisis could not be worse.
Europe’s bid to resolve its own roiling debt problems appears to be faltering. Its leaders last week agreed to a sweeping second bailout for near-bankrupt Greece that will also impose losses on some investors, mostly big European banks, in what economists are calling a “limited” default.
Although the agreement was hailed as a breakthrough — initially calming fears that far larger indebted nations would catch Greece’s cold — a fresh cycle of worry hit the region on Monday.
It happened after Moody’s again slashed its rating on Greek debt deeper into junk bond territory and warned that Athens’ limited default might become a model for other troubled European nations, leading to renewed sell-offs of the bonds of Spain and Italy.