While a short-lived default might be fixed without major damage to the global economy, drawing a line between short and long isn’t easy, according to Evercore’s Altman.
“If you missed an interest payment by two hours, the markets might look entirely beyond that and forgive you,” Altman said. “If you miss an interest payment by two days, four days, six days, that’s a different story. It’s very difficult to be scientific about this.”
During the final days of Lehman Brothers, Wall Street firms set up war rooms to chart the potential impact of the firm’s demise and prepare strategies to cope with the consequences. Their scenarios, which focused on credit-default swaps, didn’t forecast the contagion that quickly spread after the bankruptcy.
Now, some banks are preparing contingency plans for a possible U.S. default, such as stocking retail branches with more cash, the New York Times reported last week. Those preparations might prove useless once again.
“Nobody knows what would happen if there were a default because the reality is there’s never been even a technical default in the U.S.,” said Russ Koesterich, chief investment strategist at BlackRock Inc., the world’s largest asset manager. “Everyone’s flying blind.”