U.S. Debt Ceiling Crisis May Pose Credit, Political Risk
Published: July 29, 2011 | Country: United States
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As U.S. Congressional Leaders work to strike a compromise that will raise the country's debt ceiling before the August 2 deadline, many insureds are looking to political risk insurance coverage in the event of a U.S. credit default.
A failure to raise the $14.3 trillion debt limit by August 2 could result in rising interest rates, a declining dollar, and further contraction in the credit markets. Borrowing costs could also rise, leading to further financial challenges and even additional bankruptcies.
According to Micheal Kornblau
, U.S. Practice Leader for Marsh Trade Credit, too often U.S. companies holding large unsecured accounts receivable wait until major losses occur, or until their industry sector is already in a downturn, before considering trade credit insurance.
"This is a mistake," Kornblau notes, "because cost and availabilility of coverage at such a time, when you one most benefit from protection, is much too restrictive."
"The prior credit crisis of 2008/2009 featured a severe contraction in credit, which resulted in increased non-payment of trade receivables. Should a U.S. government default occur which rattles the credit markets, the probability of similar scenario exists."
Many international banks, investors and multinational corporations purchase Political Risk Insurance to cover losses resulting from defaults by foreign governments on their payment obligations. The focus of such policies is usually non-payment risk by developing country governments, like Jordan or Kazakhstan.
During the past year, countries such as Spain, Greece, Italy, and Portugal have been the subject of a small and growing share of these inquiries. A new trickle of inquiries for U.S. government payment risk coverage has suddenly materialized over the last few months.
However, "no claims are actually expected out of the currently evolving situation in the U.S. from a Political Risk point of view,” according to Stephen Kay
, U.S. Practice Leader for Marsh Political Risk and Structured Credit. "These developments' impact on the availability and cost of credit insurance are probably the bigger issue at this moment.
Marsh will continue to monitor the risks and advise clients of appropriate next steps.