The longer the brinksmanship in Washington drags on, the more international investors will question the safety of US government bonds. Technically, the US could avoid a default by opting to meet the debt repayment schedule but leaving other programs underfunded. The government might have no option but to withhold pay for federal employees or suspend Social Security payments.
As drastic as this seems, even this will only defer the crisis until the next round of debt repayment is due. America’s reputation as a sterling investment has already taken a hit, and this alone could see lenders demanding a premium to buy US debt in the future.
– Scott Boyd is a currency analyst with OANDA, a Forex trading company with offices in New York, Toronto, Singapore, and Dubai, and contributes to the company’s MarketPulse FX blog.
