If the US debt-ceiling debate goes
past the eleventh hour, and the
default of the world’s largest
economy becomes a reality, leading
central banks around the world are
gearing up to minimize losses and
keep the world economy functioning.

If US lawmakers don’t reach a budget
consensus and raise the debt ceiling
by Thursday October 17, the US will
become the first Western power to
default since Nazi Germany in 1933,
and will send markets into uncharted
territory.
The rest of the world is bracing itself
for what would happen if the bill is
rejected, and the US inches closer to
defaulting on its debts, which are
largely foreign- held in the form of US
Treasury Bonds.
Central banks have begun preparing
for the worst-case scenario if US
does fault, which would result in a
serious devaluation of Treasury
bonds, delayed payments, and a more
large-scale version of the current
government shutdown.
“Because in the past it’s always been
sorted out is absolutely not a reason
to fail to do the contingency
planning,” Jon Cunliffe, who will
become the Bank of England’s deputy
governor for financial stability in
November, told UK lawmakers.
“I would expect the Bank of England
to be planning for it [US default]. I’d
expect private-sector actors to be
doing that, and in other countries as
well,” said Cunliffe, who
acknowledged a default as “the main
risk to the [global] financial system”.
The European Central Bank and the
People’s Bank of China (PBC) have
struck a deal that moves both banks
farther from the dollar orbit. The two
banks agreed to ‘swap’ $56 billion
worth of yuan for $60.8 billion worth
of euros.
Many central banks have reserves in
the form of Sovereign Wealth Funds,
which are also at risk if the US
defaults, as many of the assets are
held in dollars. These investment
vehicles could be crippled by a
default. China’s is estimated at more
than $1.3 trillion - the world’s
largest.
A historic shift
Neil Mackinnon, a former UK Treasury
official, told RT the US default tango
marks a shift in the global economic
paradigm, from West to East.
If the US doesn’t act soon, “the dollar
will decline and its importance will
move to a multi-polar currency
system and other currencies will take
on board more importance,” said
Mackinnon.
Over the weekend, economic leaders
from around the world met in
Washington DC at the International
Monetary Fund’s annual meeting. The
fund’s managing director, Christine
LaGarde, issued a harsh warning the
global financial system could enter a
recession if the US misses its debt
deadline.
The US Senate said they will
announce a deal to end the shutdown
and extend the debt ceiling on
Tuesday, which will pass through to
the House, where it will face Obama’s
hard-nosed Republican opponents
who want to cut funding of the
Affordable Care Act.
Senate Majority Leader Harry Reid, a
Democrat, said Tuesday has the
potential to be a “bright day” and
bring calm back to the global
markets.
http://rt.com/business/plan-b-central-banks-217/