Central banks make plans for U.S. default

As talks in Congress continue, global central banks are planning how to avoid catastrophe if Washington fails to service debt payments

PUBLISHED : Wednesday, 16 October, 2013, 12:00am
UPDATED : Wednesday, 16 October, 2013, 3:05am

Central banks have begun making contingency plans on how they would keep financial markets working if the United States defaults on the world's benchmark debt.

Policymakers discussed possible responses when they met at the International Monetary Fund's annual meetings in Washington at the weekend, said officials who spoke on condition of anonymity. The discussions continued as policymakers headed home.

"Because in the past it's always been sorted out is absolutely not a reason to fail to do the contingency planning," Jon Cunliffe, who joins the Bank of England as deputy governor for financial stability next month, said on Monday. "I would expect the Bank of England to be planning for it. I'd expect private-sector actors to be doing that, and in other countries as well."

The initial response from the world's central banks was likely to echo their actions after the collapse of Lehman Brothers in 2008. Back then, policymakers pledged that they would provide ample liquidity, eased the collateral they lent against and boosted US dollar swap lines with each other to ensure supply of the currency.

The US$12 trillion of outstanding US government debt is 23 times the US$517 billion Lehman owed when it filed for bankruptcy on September 15, 2008.

"The bank has at its fingertips a range of tools to ensure the system operates properly, that liquidity conditions remain normal in all sorts of eventualities," Bank of Canada governor Stephen Poloz said in Washington on Friday. He declined to talk about specifics.

Central bankers would have had a chance to discuss the threat of default when US Federal Reserve chairman Ben Bernanke hosted a lunch of counterparts on Saturday during the IMF meetings.

Time is running short for US lawmakers as they try to end a stalemate that risks pushing the nation into default if the government's borrowing authority is not raised by tomorrow. Senate Democratic and Republican leaders were working yesterday on the details of an accord that would prevent the US from breaching the debt ceiling and end a partial government shutdown now in its third week.

"We've made tremendous progress," Senate Majority Leader Harry Reid, a Democrat, said on Monday as the chamber adjourned, adding that he hoped a deal could be announced as soon as yesterday. His Republican counterpart, Senator Mitch McConnell, said there was "substantial progress".