The Treasury Department warned on Thursday of potentially devastating economic consequences of a debt default, but investment advisers aren't worried that the country will miss a payment.
As the government shutdown ground on for a third day, there was speculation that the deadlock between Republican and Democratic lawmakers over the federal budget might continue past the Oct. 17 deadline to raise the $16.7 trillion debt ceiling.
Such an outcome would roil the stock market, increase interest rates and undermine business and consumer confidence, according to a Treasury report.
“In the event that a debt limit impasse were to lead to a default, it could have a catastrophic effect on not just financial markets but also on job creation, consumer spending and economic growth – with many private-sector analysts believing that it would lead to events of the magnitude of late 2008 or worse, and the result then was a
recession more severe than any seen since the Great Depression,” the report states.
Investment advisers are holding out hope that won't be the result of the budget fight.
“From our perspective, there's no way they will default because it could be catastrophic,” said John Nowicki, president of LCM Capital Management Inc. “I don't think [lawmakers] are that stupid.”
Donald Rice, president of Money Management Services Inc., is counting on the Treasury Department to manage revenues in a way that keeps the debt serviced, even if Congress squabbles past the debt deadline.
“There's no way we will default on a debt,” Mr. Rice said. “Politics is politics.”
Another adviser leans against a default but is wary of the depth of the tension in the capital.
“My gut says 'no,'” said Edward Kohlhepp, president of Kohlhepp Investment Advisors Ltd. “But knowing how obstinate both parties are, I wouldn't be surprised if it happens.”
Mr. Kohlhepp's clients are frustrated by political dysfunction, as Republicans have insisted on changes to the health care reform law in exchange for votes to approve a budget that would reopen the government. President Barack Obama and Senate Democrats have refused to negotiate.
Clients are calling Mr. Kohlhepp to ask whether adjustments should be made to their portfolios.
“At this point, we're saying sit tight,” Mr. Kohlhepp said. “That could change in the next two weeks.”
Mr. Rice is expecting some market volatility and is poised to take advantage.
“We're looking for a downward movement,” Mr. Rice said. “I would welcome it as an opportunity to put some funds to work.”
