Default scenarios span from local pain to 'panic'

Investment bank clients are peppering Wall Street with questions about what happens if the US Treasury in coming weeks runs out of cash and does the unthinkable - failing to make payments due on Treasury securities, the bedrock of the global financial system.

- CHRISTOPHER ANSTEY & LIZ CAPO MCCORMICK

Market participants have long assumed that, if the Treasury ran out of sufficient cash during a partisan debt-limit showdown, it would prioritize interest and principal payments on publicly held Treasuries. That $24 trillion market serves as a global benchmark for borrowing costs, serves as vital collateral for funding in money markets and forms a core part of asset holdings the world over.

The assumption has never been tested, however, and Treasury officials have long cast doubt in public about whether prioritisation is practicable. So given the intensity of the current showdown, market participants are gaming out scenarios.