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The deadlines! The arm-twisting! The threat of default!
The U.S. may be just days away from being unable to pay its bills, but Wall Street has seen this movie before, and markets seems unbothered — for now.
« One staffer on Capitol Hill likened this, the debt ceiling, to passing a kidney stone, » says Libby Cantrill, the head of public policy at PIMCO, which manages some of the world’s largest bond funds. « We all know it will pass. It’s just a question of how painful it will be. »
On Wall Street, everybody acknowledges a debt default would be devastating for markets and the economy, and most investors believe lawmakers will eventually clinch a deal as they have in the past.
« We think the stakes are too high for both sides of the aisle to really not reconcile, » says Eric Freedman, chief investment officer at U.S. Bank Asset Management Group.
Nonetheless, portfolio managers are still gaming out what could happen if lawmakers are unable to pass a deal to raise or suspend the debt ceiling.
If that were to be the case, the impact would be severe. Here’s what to expect.How bad would it be?
At the very least, there would be a huge selloff on Wall Street. In its latest analysis, UBS says the S&P 500 could fall by at least 20%.
But it’s hard to predict just how bad things could get because the U.S. has never defaulted on its debt.
Analysts believe the selloff could match or surpass a precipitous drop in September 2008, when the House of Representatives rejected a $700 billion rescue package as the U.S. was on the precipice of the global financial crisis.
The Dow Jones Industrial Average dropped about 778 points that day, which was then the largest single-day drop by points in the index’s history.
