Fiscal Responsibility

WSJ: Companies Bracing for U.S. Default

Wanted to be sure you saw this WSJ article about the uncertainty American businesses are feeling as Republicans continue to hold our economy hostage to Speaker Boehner’s short-term debt limit proposal that is dead on arrival in the Senate.

Key Point: “All the uncertainty comes just as businesses were starting to spend some of their record piles of cash. The confusion is also giving them another reason to delay hiring and investment.”

Will Republicans continue to step on the hose just as capital starts to flow back into the economy? Or work with Democrats so that we can take action quickly on a long-term, balanced solution that will reduce the deficit, avoid the catastrophic consequences of default and create certainty so businesses can invest and hire?

Wall Street Journal


Companies Bracing for U.S. Default


The unthinkable is finally becoming reality for U.S. companies, who are beginning to take real steps to prepare for the possibility of a U.S. debt default.

While companies generally expect Washington to resolve the debt-ceiling impasse at the last moment, they are lining up extra sources of financing, and carefully husbanding cash just in case a deal falls through.

All the uncertainty comes just as businesses were starting to spend some of their record piles of cash. The confusion is also giving them another reason to delay hiring and investment.

Many companies, chastened by the turmoil in short-term credit markets after the collapse of Lehman Brothers Holdings Inc. in 2008, were already holding more cash than usual. The prospect of trouble in the all-important market for Treasurys is only adding to their worries.

"Our main protection against something like that not going well, or having a rocky outcome, is to have a lot of liquidity," General Electric Co. Chief Financial Officer Keith Sherin said in an interview last week. The company ended the second quarter with a record $91 billion of cash.

GE isn't alone. Companies from Ford Motor Co. to Eaton Corp. stressed the importance of ample liquidity, in view of current uncertainties in the market—from the U.S. debt impasse to troubled European economies.

"This debt imbroglio is just giving companies another excuse not to do much," said Joseph LaVorgna, chief U.S. economist at Deutsche Bank. "They are going to hesitate to hire at a faster pace and probably be very cautious on their capital-spending outlook."

What's more, some of the short-term debt fixes could extend the uncertainty into the 2012 election year.

In a recent survey by the Association of Financial Professionals, which represents treasury and finance executives, half of the 305 respondents said failure to reach an agreement by the Aug. 2 deadline would have a detrimental impact on their access to capital and short-term investment strategies.

Half of the respondents planned to take defensive actions, such as a freeze on hiring, reducing capital spending and drawing on credit lines to build cash, the AFP said.

Ford said cash and total liquidity will help see the auto maker through any short-term difficulties arising from the lack of an agreement over the debt ceiling, but Chief Financial Officer Lewis Booth said the larger question involves the potential impact on the economic recovery.

"It's not so much what will happen in Washington in 10 days, but what impact it may have on the economic outlook for the country," Mr. Booth said in an interview. "The pace of recovery affects your operating strategy."

On Tuesday, there appeared to be little progress in breaking the debt-ceiling stalemate between the White House and Congress, a day after President Barack Obama warned of the economic damage a default and downgrade could do to the country's economy.

In its most recent survey, the AFP found that a quarter of the companies surveyed that hold U.S. Treasury securities said they would sell at least some of them if Congress and the White House failed to reach a deal.

The trade group's Tom Hunt said corporate-finance departments paid little attention to the debt-ceiling negotiations until late Friday, when House Speaker John Boehner broke off talks with the White House. The group holds a regular conference call with some 30 company treasurers.
Until the weekend impasse, "We didn't talk about the debt ceiling at all," Mr. Hunt said.

With a potential default less than one week away, Jeremy Siegel of the Wharton School and Robert Shiller of Yale debate the possibility of a U.S. financial crisis and what can be done to avert it.

Terry Crawford, AMC Entertainment's treasurer, said the weekend was an inflection point, boosting concern because companies had expected more progress toward a solution. The debt-ceiling debate has been the subject of board-level discussions at the company, which has stepped up hedging of interest-rate risks to guard itself against possible market volatility.
"If the NFL can settle," Mr. Crawford said, "I don't know why Congress can't come together for an extension."

Corporations are worried about a default because the consequences for the financial system are unknown. Treasurys serve as the basis for companies' borrowing costs, are key holdings for banks and money-market funds and are used as collateral in short-term lending markets.
Many corporate finance-executives said they are trying to prepare for a situation similar to the one that occurred after Lehman Brothers' failure, when the banking system froze up and cash become almost impossible to borrow at any price.

Chemical company FMC Corp., which makes two-thirds of its sales overseas, has extended its foreign-currency credit lines to be positioned for the possibility of a U.S. dollar devaluation, Treasurer Tom Deas said. The Philadelphia-based company also has added new banks to its stable of regular lenders in an effort to ensure liquidity in case of the unknown.

"Usually you can figure out the worst-case scenario and prepare for it," said Brad Larson, treasurer of costume-jewelry chain Claire's Stores. "Here, you can't figure out the worst case, because no one has any idea what's going to happen."

Eaton, a maker of electrical and hydraulic parts, is keeping "a highly liquid balance sheet" partly because of issues like the debt debate, said Chief Executive Alexander "Sandy" Cutler.

As of June 30, Eaton had $282 million of cash and $601 million of short-term investments. "We're well-equipped to be able to deal with what may come out of either some action or lack of action over the next couple of weeks," Mr. Cutler said.