US Companies Fear Dire Consequences from Default

US financial executives see dire consequences to prolonged political theatre in Washington and a potential US government default, according to a survey released by the Association for Financial Professionals (AFP). 

On 3-4 October, AFP surveyed financial executives in the corporate treasury and finance departments of a broad range of US companies across many industries, receiving 964 responses. The survey found that in the near term, finance executives believe political wrangling in Washington will lead to reduced demand for US goods and services and that a failure to raise the country’s debt ceiling in time will result in reduced capital expenditures and reduced hiring or lay-offs at many companies. 

The damage goes beyond just short-term consequences. Forty per cent of organisations report that they are holding back on making growth-oriented investments in the US because they are having difficulty evaluating US investments, due to the recurring battles over budgets and debt limits.

“Companies are issuing a warning: A default will lead to lower capital investment and job losses, and slowing business activity amid an already-tepid recovery,” said Jim Kaitz, AFP’s president and chief executive officer (CEO). “Companies are already expecting lower demand for their goods and services as a result of the budget and debt ceiling impasse.”

Finance professionals expect lingering uncertainty emanating from Washington to impact demand for their products and services, with 41% expecting a negative impact on their own products and services and 35% expecting their companies to have decreased demand for others’ products and services. 

A default would make US Treasury securities, an investment vehicle used in many companies’ short-term investment portfolios, far less attractive.

The survey found that one-sixth of US organisations currently holding US Treasury securities would shift out most or all of those investments if the debt ceiling isn’t raised in time.  A further 36% of organisations would hold onto their current holdings of Treasuries, but would not purchase these securities going forward.

Meanwhile, half of the respondents say that a government default would harm their organisation’s access to, and raise their cost of, capital.  An increase in the cost of bank credit and higher cost of debt financing were each cited as possible outcomes by 27% of financial professionals.

The complete survey findings can be viewed as a PDF at www.afponline.org/ceiling or contact pr@afponline.org for a copy of the data.

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