Good morning,
“Basically, Republicans and Democrats can't come together,” Mark T. Williams, a former bank examiner for the Federal Reserve, tells me. “It seems like brinkmanship, and that's taking precedence over the profound financial implications if we should default.”
The White House and Congress have yet to come to an agreement about raising the U.S. debt limit. The U.S. could be unable to pay its bills and default on its debt as soon as June 1, Treasury Secretary Janet Yellen has warned. The federal government hit its $31.4 trillion debt limit in January.
I had a conversation with Williams, currently a master lecturer in the finance department at Boston University’s Questrom School of Business, about the financial impact if U.S. lawmakers fail to raise the debt ceiling, and why CFOs should prepare.
“If politicians can't come to an agreement, then that could be the final push that moves us into recession,” he says. The short-term impact would be an increase in interest rates and an increase in the cost of capital for corporations, William predicts.
"Is there a probability of a default? Absolutely," he says. "It may be a low probability, but if it does occur, CFOs need to be prepared with a good risk management perspective."
He continues, “The stress test would be this: The debt ceiling can't be agreed to, and basically default happens. The cost of capital for U.S. Treasuries goes up, which pushes the cost of capital for all corporations up, that then impacts the economy, and we roll into recession. How does that impact my specific organization, and what can we do about it?”
Executives at Bank of America, JPMorgan Chase, and Citigroup are warning the damage to U.S. businesses and the economy will start before a technical default. As financial firms rush to prepare, they’re already accumulating expenses, and “assigning workers and executives—including heads of trading, corporate banking, and consumer banking—to study how the government’s failure to pay bills would cascade through markets,” Bloomberg reports.
“I'm sure firms are thinking about cash,” Williams says. “We still have uncertainty in the regional banking market, and that’s concerning as well. Many corporations have really moved their deposits to larger banks like Bank of America and JPMorgan and away from the regionals. And that's why I think PacWest and Western Alliance, those banks lost a lot of deposits.”
Scenario planning and having “a really highly recurring revenue and cash flow model” are vital, says Katie Rooney, CFO at Alight, a provider of benefits administration and cloud-based HR and financial solutions. “So, I have great visibility in terms of—do I need to make different decisions today?” Rooney says.
“You always have to take into account all of the macro scenarios, whether it's COVID, the debt ceiling, or a banking crisis,” she says. “The first priority is always a healthy balance sheet because, in uncertain times, I always want to have the financial flexibility to take action for my company on what needs to happen." For example, “We invested more during COVID,” she explains. "We built out our work-life platform through that period of time."
The clock is ticking on a debt ceiling decision with much at stake, Williams says. “This is a politically-made financial storm that should be avoided at all costs,” he says. “To lose credibility in the global capital markets would be devastating to the U.S. and would cost trillions of dollars. And it would also have a ripple effect on the global economy, and U.S. corporations.”
Sheryl Estrada
sheryl.estrada@fortune.com
