U.S. debt drama: Financial experts still hopeful

There are many ways to interpret the ongoing U.S. debt ceiling crisis. Many in the Canadian financial industry feel it’s a pointless production before an inevitable resolution.

“This is nothing but a show,” said David L. Fingold, lead portfolio manager of the Dynamic Global Discovery Fund. “This is a manufactured crisis.”

It’s not a debt and deficit issue, it’s about the U.S. government’s ability to function, said Paul Taylor, chief investment officer, BMO Harris Private Banking.

“They can pay their bills,” said Taylor. “The question is, is the U.S. government dysfunctional and can they not come to an agreement as to how they pay their bills?”

As time runs out for an amicable deal to resolve the debt crisis, the global markets continue to shudder and shake. But industry experts still believe it will all be resolved in time. “We do believe the greater good will prevail and the politicking will move aside and an agreement will come together. I think they’ll get a deal done,” said Taylor.

In the meantime, the world markets are getting increasingly frustrated at the antics of a handful of right-wing Republicans, who Taylor says are holding the U.S. hostage when the broader electorate needs a green light to move forward.

Fingold didn’t hide his exasperation when he said renegade Republicans representatives are “completely missing the point.”

He referred to them as “a bunch of people who want smaller government, who are holding the country hostage to have a debate about the smaller government.”

There is nothing new about such debates, said Fingold, except that this one is particularly noisy. “There’s a debate every time the debt limit ever comes up,” said Fingold. “The bottom line is it is always resolved; I’m shocked this discussion is going on. The people who are complaining about government spending seriously have no idea what’s going on. I don’t think they understand how much government spending is down year over year.”

The general sense among Canadian financial experts that the debt crisis will be resolved remains unchanged. “Ultimately, I find it impossible to believe that the social security cheques are not going to get paid,” said Fingold. “Anybody who [does] not issue the social security cheques is not going to get elected.”

The U.S. has until August 2 to come up with a plan to avoid defaulting on its borrowing. Should the default come to pass, it could throw the US and world economy into greater turmoil. Experts grudgingly agree to this notion.

“A technical default will certainly increase risk; [and when] risk rises, the yields on treasuries rise, any borrowing costs linked to treasuries rise; it is an implicit tax on U.S. consumers,” said Taylor.

From an investor’s perspective, a U.S. debt default will have a dulling effect on global economic activity, which will have a negative impact on commodity prices.

“That doesn’t bode well for us here in Canada. It’s not good for anyone, so we have a right to fear that eventuality,” said Taylor.

This is where Fingold takes a different approach. What he fears is not the U.S. debt crisis but yesterday’s Italian bond auction. “What’s going on in the U.S. is irrelevant, it’s a sideshow; that’s not what’s wrong in the world today,” said Fingold. “The real problem is yesterday’s Italian bond auction. Europe can’t fund itself; the overnight financing for the European banks is drying up, because the U.S. money markets funds are reducing their exposure to the European banks. At the same time you have a third of Italy’s debts needing to be refunded between September and April.”

Investors should also beware that Spain is on downgrade watch, he added.