To be sure, not even the world’s most powerful central banks have the weapons to counter the potential fallout of even a so-called technical default, finance executives say.
“It will be like putting band-aids on a gaping wound,” Deutsche Bank AG co-Chief Executive Officer Anshu Jain said at a panel discussion hosted by the Institute of International Finance in Washington on Oct. 12.
Jain said the bank’s analysis of the consequences of even a “technical default” found that “there are aspects to that which are irrevocable.”
“Once you miss payment on U.S. Treasury debt, we don’t want to go into all of it but I’ll give you a little taste,” said Jain. “Things like tri-party repo, the underpinning of the collateral system, there are legal ramifications which we believe are probably incurable.”
JPMorgan Chase & Co. CEO Jamie Dimon said at the same event that his bank has calculated it probably processes about six or seven billion dollars a week in benefits such as social security, food stamps and veterans benefits. “We were going to fund it, despite the fact that we weren’t being paid by the government, because those people have to eat,” Dimon said.
A default, however, would be tougher to prepare for, he said.“‘‘You don’t know the effect and the ripple effect of that through money market funds, people start drawing down revolvers, people don’t know if collateral is good,” he said. “We can’t have a debt default.”
For those reasons, global financial policy makers maintain that a default is unlikely.
“It’s unthinkable that an agreement won’t be found,” European Central Bank President Mario Draghi told reporters in Washington. Japanese Finance Minister Taro Aso told Bloomberg Television’s Sara Eisen that “there’s no other way than for the U.S. government itself and the U.S. Congress to sort it out.”