Debt debate forces companies to ask: What if?

Mannequin holding red word Debt

Kai Ryssdal: And so we go on to round two of the great budget fight of 2011. That'd be the debt ceiling. Washington will soon reach its legal borrowing limit of $14.3 trillion. Some Republicans don't want to raise that cap. Wall Street says they have to.

America's biggest banks and even the manager of your 401k hold wads of Treasury bonds. The ones that would be defaulted on if the limit's not raised. So the likes of JPMorgan Chase and others are trying to figure out how to save their businesses if the government won't pay.

Our New York bureau chief Heidi Moore reports.

Heidi Moore: The U.S. Treasury, for all of its flaws, has never been a deadbeat. That's why investors buy Treasury bonds. But if Congress doesn't raise the debt ceiling, the Treasury won't be able to pay its bills. And the shockwaves could hit every bank and business in the world.

Here's Robert Tipp from Prudential Financial.

Robert Tipp: The debt ceiling is far more important than the budget showdown that we saw this past week.

JPMorgan Chase is one bank that's putting together a plan to prepare for what happens if the U.S. defaults. Terry Belton is the chief fixed-income strategist there. He says worried investors are already forcing the government to pay more to borrow from them. Foreign investors and governments like China and Japan hold about half of all Treasury bonds.

Terry Belton: Globally our clients have been very focused on it. It's a reason I think why Treasury rates rose last week.

Banks can prepare themselves for what happens if the U.S. defaults -- but everything they do would be bad for the rest of the economy.

For instance, banks would need to hoard cash so they would have to stop lending. They would ask other banks to give them stronger lines of credit. That would stop other banks from lending. And they would ask for more collateral from their clients. So all kinds of companies would be strapped for cash.

Gerry Comizio advises banks for law firm Paul Hastings. He says Congress will have to raise the debt ceiling sooner or later -- and later, it will be more expensive because we'll need to bail out the banks again.

Gerry Comizio: The economic catastrophe that could result from default by the U.S. could have the government scrambling to get Congress to re-institute major aid programs again to the large banks to avoid a replay of a total implosion of the economy.

That's the doomsday scenario. But most people on Wall Street hope and believe it will never come to pass. They expect Congress to raise the ceiling in time.

In New York, I'm Heidi Moore for Marketplace.

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Is this the first time Republicans and Wall Street disagree?

Your team appears to conflate a cap on debt with default and report the story as though default is the only option should the Congress not extend the cap. But of course another option is the Congress takes steps to prioritize spending, cutting expenditures to align with our existing revenue income. There's no reason to suspend interest payments or default. There would be reason to trim spending.

If Congress doesn't raise the debt ceiling that doesn't necessarily mean that the government will default, any more than an individual reaching his credit limit means he'll go bankrupt. All it means is that the government won't be able to spend any more money that it doesn't have, which is unquestionably a good thing.

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