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Banks: Default consequences ‘grave’

By Claes Bell, CFA · Bankrate.com
Thursday, July 28, 2011
Posted: 3 pm ET

Just in case you were hoping the whole debt-ceiling U.S. default thing would just fizzle out and go away Y2K-style, today the heads of major banks signed a letter to President Obama and the Congress saying, in effect, a U.S. default would be really, really bad. From the letter:

The consequences of inaction -- for our economy, the already struggling job market, the financial circumstances of American businesses and family, and for America's global economic leadership -- would be very grave.

Our economic recovery remains very fragile. A default on our Nation's obligations, or a downgrade of America's credit rating, would be a tremendous blow to business and investor confidence -- raising interest rates for everyone who borrows, undermining the value of the Dollar, and roiling stock and bond markets -- and, therefore, dramatically worsening our Nation's already difficult economic circumstances. Given this very real risk, policymakers must correct our fiscal course now, inspire market confidence by paying all of our bills on time, and demonstrate that America is a democracy capable of putting differences aside to solve our most challenging problems.

The message here probably isn't anything you haven't heard if you've been paying any attention to this issue. Our own Greg McBride told Market Watch a few weeks ago that in the event of a default, "There will be no safe haven."

What's interesting about this default warning is its source. From Kate Davidson at American Banker:

Banks have largely refrained from weighing in on the debt ceiling debate, fearing their input could undercut negotiations.

You know when the "masters of the universe" are getting nervous, things aren't looking good for your average consumer. We can only hope that partisans in Washington, D.C. realize that any victory that comes at the cost of a default would be a Pyrrhic one, both for consumers and likely for the politicians that engineered it.

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4 Comments
Claes Bell
July 28, 2011 at 11:41 pm

Amy, you're right. One could easily say that had the banks and ranges agencies summoned up some of this earnest concern for safety and soundness in say, 2006, we wouldn't be here, most likely. But the fact remains they're right about the debt ceiling now, and if they convince a few folks in DC of the danger of a US default, that's a net positive.

Anne from Mesa
July 28, 2011 at 9:42 pm

It is ironic to read that those who created the financial crisis are now in a warning mode. And what about S&P, hurrying to warn the public about the effect on the US credit rating. Where and when did they do the same with the financial institutions? When they were heavily involved in their financial gambling schemes we didn't hear anything from these well paid rating firms.