Treasurers Brace for Market Turmoil

As Congress fails to repair the rift over raising the nation’s borrowing limit, smart companies are guarding against a liquidity crisis.

Other actions treasurers and CFOs may want to take include the following:

Avoid holding U.S. dollars in foreign subsidiaries that deal in the euro, the Japanse yen or the British pound, says Guido, who also writes a column for CFO. VF has taken that action where it can. “A U.S. default would be bad for the U.S. dollar,” he says.

Try not to hold any cash investment products that are closely tied to Treasuries and where principal is at risk. That includes Treasury-bill funds and short-term bond funds. “A default will cause a spike in short-term interest rates and losses on short-term investments,” Guido says.

Delay any stock repurchases. “Any companies engaging in share repurchases that are not in a blackout period may want to hold off,” Guido says. “A default could come with a 1,000 point drop in the [Dow Jones Industrial Average].”

With Congress still working on alternate plans to end the federal budget impasse, late Tuesday Fitch Ratings put the U.S.’s tripe-A rating on “rating watch negative.”

“The Treasury may be unable to [prioritize] debt service, and it is unclear whether it even has the legal authority to do so,” Fitch said in its note. “The U.S. risks being forced to incur widespread delays of payments to suppliers and employees, as well as social security payments to citizens — all of which would damage the perception of U.S. sovereign creditworthiness and the economy.”

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