FX.co ★ Even if US debt limit settled, markets will be badly bruised

Analysts at Bloomberg warn that market participants are unaware of serious repercussions, even if US legislators pass a deal on the federal debt ceiling. Other Wall Street experts are on the same page, saying that the last-minute deal will prevent the US government from defaulting on its debt but will entail devastating consequences for the US economy.

According to Ari Bergmann, an analyst at Penso Advisors who specializes in hard-to-manage risks, investors should stay alert and hedge risks that could arise from the debt limit agreement.

Experts believe that the US Treasury Department has to engage all available tools to replenish dwindling liquidity. Meanwhile, the government is rapidly running out of cash and soon will not be able to pay its debt obligations.

For the time being, the amount of bank liquidity is very modest, but servicing the federal debt worth $1 trillion is sure to drain liquidity from the banking sector soon, the analyst warns. This will take its toll on the US economy which is already slipping into a recession, Ari Bergmann added.

At the same time, the expert at Penso Advisors is cautious about what will happen after the Treasury replenishes cash liquidity on the back of shrinking bank reserves.

The analyst predicts that as soon as the debt limit deal is nailed down, the dynamics of the Treasury cash balance, the Federal Reserve’s quantitative tightening program, and the fallout from high borrowing costs will put a great strain on risky assets and the US economy.

After Washington resolves the gridlock, the Treasury’s cash reserve is likely to swell to a record $550 billion by late June from the current $95 billion. According to the Treasury’s estimates, this figure could balloon to $600 billion. Notably, this outlook is not rock-solid because experts do not rule out other developments.