How Does the Debt Ceiling Issue Impact Your Finances?

Pushed Up to the Limit

The US hit its $31.4 trillion debt ceiling last Thursday, meaning the federal government is up against its borrowing limit set by Congress. In response, Treasury Secretary Janet Yellen says her department has begun taking “extraordinary measures” to avoid a default on the government’s debt.

Yellen urged Congress to negotiate and reach a solution quickly, adding Americans likely won’t feel the effects until sometime in June. If the US does default on its debt, which has never happened before, economists warn a global financial crisis could occur.

What’s Most Affected

As part of the US Constitution, Congress must approve of any debt taken on by the federal government. The legislative body instituted the debt ceiling more than 100 years ago to avoid the need to approve each line item request for borrowing. But what happens when borrowing exceeds that amount and there’s not enough money to cover obligations?

Experts say the stock market would be negatively impacted, as well as the value of bonds. The US dollar would also likely weaken and individuals’ retirement accounts, such as 401(k)s, would lose value. Eventually, the government could lose its ability to fund programs like food stamps, Medicare, veterans’ benefits, and Social Security.

Overseas Intrigue

Analysts say traders are now preparing for the worst case scenario. For some, that means exploring high-quality international stocks and bonds, denominated in foreign currencies. This would (theoretically) allow for a position insulated from a potential US government default.

A recent report from Morgan Stanley (MS) argues emerging markets have more upside than the US at present. Barclays European (BCS) recently released a research note stating a similar position, with a preference for the Eurozone. It’s worth noting the euro STOXX benchmark has outperformed the S&P 500 by over 18 points, dating back to September.

Big picture, many financial advisors coach their clients to diversify their portfolios. Owning international stocks falls under that umbrella.

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