The only relative safe haven in North American equities in the event of a U.S. default would be Canadian banks, though even they would feel the ripple effects, according to a report from Keefe, Bruyette & Woods.
Although lawmakers will most likely reach a compromise regarding the $14.3 trillion U.S. debtceiling, investors should contemplate a downgrade by at least one credit rating agency, and its possible effects on the economy and interest rates, the report said.
In the unlikely event of a default, there would be broad implications for the economy, currency and the bond and equity markets.
"There would be major disruptions in payments creating a liquidity event and a general 'freezing up' of the financial system and economy," the report stated. "The only relative safe haven in our North American equity coverage universe would be Canadian banks, and even they would likely be impacted from the spillover of a weakened U.S. economy."
Royal Bank of Canada , Toronto Dominion Bank , Bank of Nova Scotia and Bank of Montreal are among the largest Canadian banks.
Some of the largest U.S. banks that could be affected in the event of a ratings downgrade or default include Bank of America , Citigroup , JPMorgan Chase and Wells Fargo.
The report also noted that a possible credit-rating downgrade may result in a modest increase in long-dated Treasurys and could increase the cost of insuringU.S. debt, the report stated.
In the intermediate term, the report suggests that economic conditions, rather than ratings, would be the primary determinant of interest rates.
"Our primary concern is that over the next 6 to 12 months, the negative consumer sentiment surrounding a rating downgrade on the U.S. would have a large enough negative impact on U.S. growth that the net impact would be lower interest rates," according to the report.
If spending did weaken, the Federal Reserve may make monetary policy more accommodative through possible further quantitative easing, the report said.
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