WASHINGTON — The chairman of the committee of investors and bankers that advises the Treasury Department warned this week that a default could trigger another financial crisis.
In a letter dated Monday to Treasury Secretary Tim Geithner, the chairman of the Treasury Borrowing Advisory Committee said foreign investors could reduce their purchases of Treasuries on a permanent basis, or even sell some existing holdings, as they did after Fannie Mae and Freddie Mac were placed under conservatorship.
"Despite assurances from Treasury officials regarding the U.S. commitment to these institutions, foreign sponsorship has yet to return to pre-conservatorship levels," wrote Matthew Zames, who is also a managing director at JPMorgan Chase. "If foreigners begin curtailing their investments in Treasuries as a result of the default, Treasury rates, and thus Treasury's borrowing costs, would undoubtedly rise."
Even an extended delay in raising the debt ceiling could cause borrowers who rely on short-term funding markets, including the government sponsored enterprises, to try to pre-fund themselves or hold excess liquidity through July, Zames said. This could negatively impact markets well before a default occurs, and he said action is "urgently needed" to raise the statutory debt limit.
Zames said a default could also lead to a downgrade of the U.S. sovereign credit rating; trigger a run on money market funds, as was the case after Lehman Brothers failed; severely disrupt the Treasury financing market; and increase borrowing costs and restrict credit for consumers.
