A real U.S. debt default is expected to lead to financial Armageddon.
1. A global stock market crash: Investors have been mostly ambivalent about the government shutdown and the looming default. The Dow is up about 0.5% since the shutdown began earlier this month.
But nearly all analysts and investors I’ve interviewed over the past two weeks say that if the U.S. fails to make an interest payment on its debt, stock markets around the world will immediately crash. Some fear a quick drop of 1,000 points in the Dow Jones Industrial Average. Stock markets in Asia and Europe would likely be hit too. No stock market would be insulated.
2. A global recession: Plunging stock prices do not necessarily cause economic recessions. But in the worst-case scenario of a technical default on U.S. debt, the blow to world markets would be so extreme that some fear an almost immediate economic slowdown.
“If there’s a one day fall in the markets, that can be reversed. But a fall in the world’s stock markets and the dislocations that would be caused by non-payment on U.S. debt, that cannot be reversed,” said Komal Sri-Kumar, President of the global consulting firm Sri-Kumar Global Strategies. “You will see global growth come to a halt.”
