Global banking leaders sound default alarm

Leaders of some of the world’s largest banks said on Saturday that they don’t know exactly what would happen if the United States defaults on its debt — but they are sure it would be disastrous.

Congress is spending the weekend trying to figure out how to get around an impasse over raising the government’s $16.7 trillion borrowing limit and how to re-open the government, but as of Saturday afternoon it remained unclear how a deal would be struck.

“In my opinion we will not default,” JPMorgan CEO Jamie Dimon said during a panel discussion at the annual meeting of the Institute of International Finance, a bank trade group, in Washington. “I think any responsible person I know including in government knows that. I think it would ripple across the global economy in ways you couldn’t possibly understand.”

The Treasury Department has warned that Congress must lift the debt ceiling by Oct. 17 when the U.S. is slated to exhaust its borrowing authority.

Other leading bankers at the IIF event joined in warning about the consequences of Washington not reaching a deal.

“It would be utterly catastrophic,” said Deutsche Bank Co-Chair Anshu Jain, stressing the importance of the U.S. dollar in international finance. “This would be a rapidly spreading fatal disease.”

Jain said suggestions that the consequences of a default would be “tiny” are false.

While Dimon expressed optimism Saturday that a deal will be reached, JPMorgan and other large financial institutions have begun taking precautions. For instance, JPMorgan told investors this week that its money market funds no longer own Treasury securities that mature or have scheduled coupon payments from Oct. 16 to Nov. 6.

PIMCO CEO Mohamed El-Erian, one of the world’s largest fixed-income investors, said at the event that a U.S. default could call into question the U.S. debt securities that are used as collateral by financial institutions in transactions every day. Anyone looking at the critical role Treasury securities play in the plumbing of that system, he said, can see that forcing a default could cause a crisis that dwarfs the bankruptcy of Lehman Brothers in 2008.

“You will freeze the system,” El-Erian said.

But El-Erian said PIMCO still holds some short-term Treasury bonds and, like Dimon, is confident Washington will ultimately strike a deal. He suggested Treasury would probably have enough revenue to pay bondholders through early November if the debt ceiling isn’t raised even if other bills are not paid on time. But administration officials, such as Treasury Secretary Jack Lew, have warned that there are both legal and technical questions about whether Treasury can pay some creditors and not others in the event the government can no longer borrow.

JPMorgan manages $6 billion to $7 billion in Social Security, veteran’s benefits and other U.S. payments every week to clients who could be at risk due to a default, Dimon said.

If the borrowing limit is not increased, Dimon said he didn’t know when exactly the trouble would start, but that it would soon threaten money market funds, which are considered a safe place for investors of all sizes to park their money.

Dimon said the U.S. and global economies are improving and pleaded with lawmakers not to spark another global recession.

“Please let’s not shoot ourselves in the foot,” Dimon said. “It’s a risk that shouldn’t be taken.”