The U.S. shouldn’t risk defaulting on its debt because doing so would wreak havoc in the world’s economy and financial markets, said the heads of JPMorgan Chase & Co., Deutsche Bank AG and Pacific Investment Management Co.
“The United States cannot default and, in my opinion, will not default,” JPMorgan Chief Executive Officer Jamie Dimon said yesterday during a panel discussion at a financial industry conference in Washington. “It would ripple through the global economy in a way you couldn’t possibly understand.”
“When push comes to shove there will be an agreement,” Pimco CEO Mohamed El-Erian told the same event. A default would “trigger failures” in collateral markets and “be a big blow to the economy,” he said.
The warnings from the leaders of modern finance echoed those made by international economic policy makers also meeting in the U.S. capital and came as lawmakers said they lack a clear plan for preventing a default and ending the government shutdown that’s now entering a 13th day. U.S. borrowing authority lapses on Oct. 17 unless the nation’s $16.7 trillion debt ceiling is lifted.
“It’s unthinkable that an agreement won’t be found,” European Central Bank President Mario Draghi told reporters in Washington. “It’s quite obvious that if this situation were to last a long time, this would be negative, very negative for the U.S. economy and the world economy.”
The economy has been gaining strength and a default now could reverse that progress, Dimon said. “Please, let’s not shoot ourselves in the foot,” he said. Deutsche Bank co-CEO Anshu Jain called the prospect of even a small default “utterly catastrophic.”
JPMorgan is the largest U.S. bank by assets and based in New York. Deutsche Bank, based in Frankfurt, is the biggest in Germany. Pimco of Newport Beach, California, manages the world’s biggest bond fund.
“There isn’t life beyond default,” Jain said during the panel discussion with Dimon at the conference held by the Institute of International Finance, an industry group. “This would be a very rapidly spreading, fatal disease.”
The potential consequences are so unfathomable that Jain said he couldn’t offer the audience any meaningful recommendations on how to react.
“Europe was paralyzed at the possibility of an Italian default, which was a 2 trillion euro economy,” Jain said, referring to the continent’s debt crisis. A U.S. default would be far worse with incurable legal problems, he said. “You’re now talking about the underpinnings of finance,” Jain said.
Upsetting collateral transactions would make fallout from the 2008 collapse of Lehman Brothers Holdings Inc. look “not as bad” in comparison, said El-Erian. Pimco still holds short-term Treasuries because it anticipates a pact, he said.
The Reserve Bank of India is also holding on to its reserves of Treasuries even though U.S. debt has become “mildly less attractive,” Governor Raghuram Rajan said yesterday.
The consequences of default “would be absolutely disastrous, considering the role of the U.S. dollar,” said Baudouin Prot, chairman of Paris-based BNP Paribas SA. “I don’t believe for one second that this scenario will occur.”
Even as default looms, Jain said the dollar’s status as the world’s reserve currency is here to stay.
“There’s no alternative” and there won’t be one for at least a decade, he said. Jain said he would have liked to have seen the euro occupy more of that role. “The European crisis over the last two or three years has set that back,” he said.