WALL STREET bankers, from senior executives to traders, are complaining that the Federal Reserve is refusing to engage in scenario-planning for a downgrade or default by the US.
With days to go until the US treasury’s August 2nd deadline to raise the debt ceiling, bankers said they were not getting a response to efforts to discuss the market impact of a failure to reach a deal in Washington or if rating agencies cut the country’s triple A rating.
They want to address contingency planning for a run on money market funds that hold Treasury bonds, the impact on capital ratios if balance sheets balloon with a sudden influx of deposits and the potential effect on the repurchase, or “repo”, market of short-term bank financing.
“The responsible government people aren’t engaging and I bet a piece of it is they are really not sure what to do,” said one person on the industry side.
Another said: “We don’t have any information from them. For the government shutdown [when budget disagreements closed down the federal government], at least we had a road map.”
The Fed has found itself in the unusual situation of being the principal regulator of the financial system and the agent of the US government, with responsibility to pay the treasury’s cheques, process its electronic payments and issue, transfer and redeem treasury securities.
The treasury has so far refused to make public any contingency plans if there is no rise in the debt ceiling. Unless it says, for example, whether it would prioritise interest payments, then it is hard for the Fed to discuss the potential implications with banks.
Bankers believe the Fed is afraid of sending signals that it is gearing up for a downgrade or a technical default.
In contrast, the International Swaps and Derivatives Association was last night expected to publish guidelines for the settlement of credit default swaps on US debt if there are missed payments.
Lenders are concerned about operational issues as well as the question of how the Fed would support the financial system if there were disruption caused by a failure to raise the debt ceiling. Banks would like to know if the Fed would be willing to lend against treasuries with a defaulted interest payment, which would support the repo market. – Copyright The Financial Times Limited 2011
