Debt-limit stalemate worrying investors

2011-07-25T14:00:00Z 2011-07-27T09:06:21Z Debt-limit stalemate worrying investorsBy JIM OFFNER, Waterloo Cedar Falls Courier

WATERLOO --- The posturing coming out of Washington, D.C., over the nation's debt ceiling and federal budget has certainly sent jitters through the stock market and other financial institutions.

But financial advisers, bankers and brokers agree say business will go on unbroken.

Few foresee the U.S. defaulting on its debts, which, they say, would cause interest rates to shoot up and add to the costs of servicing a national debt that currently tops $14 trillion.

In the event of a default, stock portfolios could take a short-term hit and small U.S. companies likely would be hurt most, said Creighton University economist Ernie Goss.

"Long-term interest rates, including mortgage rates, would rise," he said. "Short-term interest rates would change very little, since the Federal Reserve controls short-term interest rates."

Stockholders might feel the biggest shock, he said.

"Due to a significant upturn in risks, most portfolios would decline significantly," he said. "However, stock prices of smaller domestically oriented firms would take the biggest negative hit."

Large companies that participate in the international marketplace, Deere & Co. among them, would be less affected, Goss noted.

He did say, though, that "stocks linked to U.S. housing would be hit very hard, due to rising uncertainty and escalating mortgage rates."

He also said the likelihood of a default were "very, very small."

Banking officials hesitate to predict any fallout, should a deal not be reached. However, John Sorensen, president of the Iowa Bankers Association, said lending would go on as usual.

"That wouldn't be impacted by any type of default, nor do we think there will be one," he said. "Our sense is the political leadership will. . .realize their responsibility."

If the U.S. credit rating were downgraded, interest rates would go up, which would hit all borrowers, Sorensen said.

He added that many banks are holders of government bonds, "so there's the potential impact there."

Possible fallout on the financial markets is a concern, Sorensen said.

"No one is acting irrationally at this point, but you have to be concerned about the reaction, from a confidence standpoint, from the players in the market," he said.

A default would cascade negatively on consumers, said Joe Vich, CEO at Community National Bank in Waterloo.

"You'd presume that rates would soar and we'd have difficulties as a country meeting our obligations," he said. "It stands to reason it would be a negative impact on the consumer."

He, as others, said he couldn't speculate.

"I'm not sure any of us really know, at this point," he said.

Steve Tscherter, president and CEO of Lincoln Savings Bank, based in Reinbeck, said he couldn't predict how the ongoing debt crisis would affect lending.

"It just doesn't lend consistency to the entire money spectrum," he said. "Without consistency, you have little to hang your hat on to make loans."

Eliminating the debt ceiling would lead to higher costs for consumers, said Casey McLaughlin, a broker with McLaughlin Investment Services in Waterloo.

"Then it comes down to ratings on the debt you put out there, and even Moody's and Standard & Poors say they're going to take a long-term look at debt side," he said. "We're not necessarily guaranteed the Triple-A rating we've been able to enjoy. Then, you're talking about higher borrowing costs, and those will filter to mortgages, cars and credit card rates that affect consumers."

Investors who are in for the long-term likely shouldn't worry, said Rich Brandhorst, a broker with FSB Warner Financial Inc. in Waterloo.

"If you're concerned about your portfolio taking a hit or downturn, you'd ask what is the purpose of the portfolio; if it's long-term growth, that's not going to be affected," he said.

Short-term investors probably have the most at stake, but a year before a national election, lawmakers have every incentive not to damage the economy, he said.

"A vast majority of election years are good stock market years," he said. "Our legislators are going to do everything possible to have a good economy and stock market in an election year."

If no deal is reached, "we will continue to meet our members' borrowing and savings needs," said Monte Berg, senior vice president of finance at Veridian Credit Union in Waterloo. "The conversations in Washington are interesting, and I think a positive result of the debate will be a long-term plan to reduce the federal deficit."

Copyright 2015 Waterloo Cedar Falls Courier. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

(4) Comments

  1. Bears2010
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    Bears2010 - July 28, 2011 10:47 am
    Dfrank at what point does this stop being the fault of Bush and fall into the lap of Obama? In your world never and that is part of the problem. Ask yourself what has Obama done since taking office. If you look at it without blinders on it is quite revealing.
  2. dfrank5775
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    dfrank5775 - July 27, 2011 11:28 am
    Well, if bush wouldn't have put us in this mess. It takes a long time to dig out of a hole as deep as this.
  3. tllorenz
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    tllorenz - July 25, 2011 8:01 pm
    Increasing the deficit and deficit spending by Congress is the problem we want to be concerned about. U.S. taxpayers cannot afford the destruction of our way of life caused by our governments borrowing from foreign interests. The dollar is being destroyed and along with it our independent control of our destiny, decisions we make for ouselves as a free nation. The scenario for this will not be pretty.
    If we don't control it now, a foreign entity who is not our friend will force us to control it as is happening in Greece.
    Congressional appetite for spending is unquenchable and the deficit will not be reduced or eliminated no matter how much they raise our taxes.
    It is interesting to read how in a very short time of being in office our elected representatives including the President have enriched themselves at the same time U.S. taxpayers are being robbed.
  4. crcoia
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    crcoia - July 25, 2011 3:54 pm
    The politcal class will only be happy when they have all the rest of of us begging for our government cheese.
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