Student
A. EXCUTIVE SUMMARY
By the end of the day Oct. 17, the US Treasury will max out its ability to borrow money and be left only with the cash on hand to pay bills going forward, unless Congress raises the debt ceiling. Otherwise, defaulting on obligations would shake financial markets to a degree not seen since the Great Depression. In this report, we give a structured view of what are the key risks in the financial markets and global environment for the US debt default and verify whether we can risk manage the US debt default.
In the Section B, we find that the significant market, credit, liquidity, and reputational risks of the US debt are likely increase the global interest rates and strike the financial markets. This is because if the US government fails to repay the money it owed, the value of the bonds would decrease and it would not be perceived as save investment anymore. And the yield of the bond would rise. This would prompt interest rates around the world, which are often tied to those of US Treasuries, to spike. Sequentially, these risks will further impact financial markets including equities, commodities, foreign exchange, credit default swaps, repo, and money market funds etc. It is very likely that the global financial markets would plunge, while risk adverse investors would adjust their risk appetites and risk profiles to look for new save heaven assets, as markets are getting more volatile and confidence is destroyed.
Furthermore, in Section C, in global environment, we believe that the interconnection of US debt and US creditors in emerging markets and developed markets has amplified the risk spillover, leading to the capital outflow of emerging markets and significantly dragging down the global economic recovery. The largest two creditors - China and Japan will suffer great loss from shrinking of foreign reserves to dire prospect of exports, as there would be large foreign currency risk exposure, thanks to US debt default.
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By the end of the day Oct. 17, the US Treasury will max out its ability to borrow money and be left only with the cash on hand to pay bills going forward, unless Congress raises the debt ceiling. Otherwise, defaulting on obligations would shake financial markets to a degree not seen since the Great Depression. In this report, we give a structured view of what are the key risks in the financial markets and global environment for the US debt default and verify whether we can risk manage the US debt default.
In the Section B, we find that the significant market, credit, liquidity, and reputational risks of the US debt are likely increase the global interest rates and strike the financial markets. This is because if the US government fails to repay the money it owed, the value of the bonds would decrease and it would not be perceived as save investment anymore. And the yield of the bond would rise. This would prompt interest rates around the world, which are often tied to those of US Treasuries, to spike. Sequentially, these risks will further impact financial markets including equities, commodities, foreign exchange, credit default swaps, repo, and money market funds etc. It is very likely that the global financial markets would plunge, while risk adverse investors would adjust their risk appetites and risk profiles to look for new save heaven assets, as markets are getting more volatile and confidence is destroyed.
Furthermore, in Section C, in global environment, we believe that the interconnection of US debt and US creditors in emerging markets and developed markets has amplified the risk spillover, leading to the capital outflow of emerging markets and significantly dragging down the global economic recovery. The largest two creditors - China and Japan will suffer great loss from shrinking of foreign reserves to dire prospect of exports, as there would be large foreign currency risk exposure, thanks to US debt default.
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