(NEW YORK) — Amid another day of triple-digit losses for the Dow, U.S. financial firms are putting together plans for a worst-case scenario that involves a default on government debt and the resulting disruption to bond, credit and equities markets.
Michelle Girard, an economist at RBS, says that her firm continues to believe that somehow the government will come to a solution to this debt ceiling crisis at the last minute, but RBS is still having non-stop meetings to test all sorts of systems to make sure that if there is a default it and other firms can function properly.
“What scares you is that you don’t know what you don’t know,” Girard said. The markets are worried that despite all the planning and stress testing, there is a scenario that they haven’t planned for that can throw the system into turmoil.
Most firms are gaming out the worst-case scenarios, but Girard doesn’t believe that investors will truly start to panic until the deadline gets closer. That, she says, is in part because, “Investors feel like they have seen this movie before and know how the ending works.” She adds that the last few times the U.S. had a fiscal crisis like this, a last-minute deal was reached.
Girard also says firms may be a bit skeptical at this point, too, because the last couple of times Washington has screamed fire, it’s been somewhat of a false alarm. In 2011 when U.S. debt was downgraded by Standard & Poor’s, borrowing costs didn’t rise — in fact, they fell and stocks recovered in a matter of months. And this past January the economy didn’t collapse when the sequester was put in place.
Still, RBS and most major firms are preparing for the worst, which would include no Social Security or entitlement payments across the board along with a government default on some specific securities.
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