Treasurys are used as collateral in trillions of dollars of loans rolling over every day. They are also the standard against which the riskiness of stocks and bonds are measured. A default would cast doubt on the value of those assets and throw the global financial system into chaos.
Which is a key reason many seem unprepared for it: Why bother if you can’t really protect yourself? Or, as an official response from France’s Total oil company put it, “Nobody can imagine the consequences, so we don’t have any plans.”
Neither apparently does Sony Corp. “There isn’t a whole lot that one company can actually do,” CEO Kazuo Hirai said Friday at the company’s Tokyo headquarters.
Still, the business world isn’t entirely unprepared. Big U.S. companies have been hoarding cash since the financial crisis for fear of another credit crunch. And financial regulators, major banks and mutual funds have moved to shore up their defenses, too.
One area of concern is Treasury bills that mature shortly after Thursday. The fear is that owners of those bills may not get their money returned to them in case of a default.
As a result, the Hong Kong stock exchange is demanding that investors who use those bills as collateral in certain trades post more of them because they are riskier now. Funds that usually are filled with Treasury bills are scrambling to protect themselves, too. In a rare move, Fidelity Investments and JP Morgan Chase said last week they had purged their money market funds of all U.S. bills coming due soon after the default deadline.
Owners of U.S government bonds due later are less likely to get stiffed. But they’re still vulnerable. In the event of a default, Standard and Poor’s and other credit-rating agencies will consider those bonds higher risk and likely downgrade them. That could cause their prices to plummet, guaranteeing losses to sellers who can’t wait until the bonds mature. But the specter of a downgrade has yet to scare many.