Hong Kong Monetary Authority keeps close eye on United States debt crisis
The Hong Kong Monetary Authority says it is closely monitoring the US debt ceiling crisis, while fears about a potential default have sparked the biggest rise in a key measure of risk aversion since the financial crisis.
"While the market generally assesses the chance of a US debt default is small, we have reminded banks to manage their liquidity risk properly. In the unlikely event of a US debt default, we will watch the markets closely and consider appropriate measures as required," the HKMA said.
Any default would have ripple effects across the globe. However unlikely it may be, the prospect of default - coupled with the US government shutdown - has seen a run on money market funds and a spike in the yield on one-month US Treasury bills.
One indication of this is the so-called "TED spread", the difference between interest rates on Treasury bills and interbank lending rates. In recent days this has widened by 25 basis points, its biggest movement this year, according to research by Jefferies, a securities trading and research firm.
On Wednesday, Hong Kong Exchanges and Clearing asked brokers to increase the collateral they and their clients put up when they use short-term US Treasuries.
The US government has until next Thursday to reach an agreement on raising its debt ceiling. Should it fail, it is likely to start defaulting on short-term debt first, hence the spike in the yield on one-month Treasury bills.
Unlike the 2008 financial crisis when there was a rush to Treasuries, this time the money flow is in the opposite direction. About US$42 billion has been withdrawn from money markets over the past fortnight, says Jefferies.
"Equity markets alongside other financial assets have shown a remarkable sang froid towards a possible US Treasury default. It seems investors have been given a hurricane or typhoon warning but have discounted [it] assuming it will leave the equity markets unscathed," said Sean Darby, chief global equities strategist at Jefferies.