SIFMA warns of debt ceiling liquidity drain

A possible US default could occur as early as 17 October, which would create a liquidity drain on affected instruments and lead to uncertain market outcomes, a leading US trade body warned on Friday.

A possible US default could occur as early as 17 October, which would create a liquidity drain on affected instruments and lead to uncertain market outcomes, a leading US trade body warned on Friday.

Pressure continues to mount on Congress to find resolution to the political gridlock that has caused a government shutdown and threatens a potential US government default if the debt ceiling is not extended.

Rob Toomey, managing director and associate general counsel for the Securities Industry and Financial Markets Association (SIFMA), said on Friday if the impasse is not breached, US Treasury’s ability to pay the principal on underlying securities and notes in October could lead to a draining of liquidity from the market.

He said SIFMA had already outlined extensive planning should a default occur when Treasury is due to make payments for certain instruments on 17 and 24 October.

“Essentially whatever the amount of that security is, that liquidity disappears from the market – at least for the period of non-payment,” Toomey said.

He added Treasury must give the market due notice about its intentions on whether it will have the funds to make these payments – preferably early the preceding day.

“The consequences [of late notice from Treasury] on the instrument are significant – it cannot be sold, it cannot be financed, it cannot be used as collateral,” he added.

Speaking to journalists on Friday, Toomey laid out SIFMA’s approach to these possible outcomes, which include extensive industry and political consultation n in the lead up to and aftermath of a potential default.

“This would be an unprecedented event and the consequences for the market are dangerously unpredictable.”

SIFMA CEO and former senator, Judd Gregg, added the political situation in Washington had reached a dangerous level, and should a default occur, the cost of capital would rise – an outcome detrimental to all US participants.

“[A default] will cause significant uncertainty which will lead to less economic activity, so it’s a very bad idea and one which hopefully won’t be pursued,” said Gregg. “I’m personally encouraged by the language that’s starting to come out of Washington. Hopefully we can get this issue behind us because it’s not acceptable.”

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