Dr Laurence Wormald (pictured), head of buy side risk research at SunGard, comments on the impact of the US debt ceiling…
US sovereign default is a very big deal, although the government shutdown has had only a mild effect on investors’ view of the US equities markets. The VIX “fear index” is at 19% which is below where it was last December. The biggest effect so far has been on short-term USD rates, which have already spiked from 2 basis points to over 9 bp yesterday.
Remember that the “Fiscal Cliff” was resolved with a short-term fix at 02.00 on 1 January, two hours after the “deadline” – markets are taking the view that a last-minute deal will be done.
However, the effects of any default will be profound (the Chinese government has already called other nations to “de-Americanise the world economy”) and the losses to investors in the latest SunGard’s APT scenarios are up to 25% loss on global equities and the US currency, if default is followed by political deadlock for another week.