Bloomberg News

U.S. Debt Accord Delay Risks Lehman-Like Moment, Gieve Says

July 29, 2011

(Adds details of yesterday’s negotiations in fourth paragraph. For more on the U.S. debt debate, see EXT6.)

July 29 (Bloomberg) -- Former Bank of England Deputy Governor John Gieve said U.S. officials’ delay in agreeing on a deal to raise the debt limit runs the risk of a disaster that would echo the collapse of Lehman Brothers Holdings Inc.

“The problem with this kind of brinkmanship is, as we saw around Lehman -- after all the Treasury wanted to save Lehman -- if you leave it to the last minute that something can go wrong, something practical goes wrong, and you run out of time,” Gieve said in an interview with Francine Lacqua on Bloomberg Television’s “The Last Word” yesterday. “I’m sure both sides fully expect to do a deal, but they’re running it very fine.”

Gieve was deputy governor for financial stability at the U.K. central bank when Lehman Brothers filed for bankruptcy in September 2008. U.S. Republicans and Democrats have been unable to agree on an increase in the nation’s $14.3 trillion debt cap or budget-deficit cuts even as the government’s authority to borrow is set to run out on Aug. 2.

Republicans led by House Speaker John Boehner were forced to scrap a vote yesterday in Washington on his plan to cut the federal deficit and raise the U.S. debt ceiling after he failed to amass enough support for his proposal.

Gieve, who is now an adviser at hedge fund GLG, part of Man Group Plc, said the delays may cost the U.S. its AAA credit rating even if lawmakers agree to raise the borrowing limit. He also said he expects a deal and that the U.S. will avoid another recession. Still, a disorderly default would rock the global economy, he said.

Disorderly

“If they default in a disorderly way this August because they can’t reach agreement, that really is going to blow the world economy sideways, and then I think we are looking at a big event that will cause another recession,” Gieve said. “If they reach a temporary deal that’s to be revisited next year before the election, and someone blinks enough to keep paying their debt and keep paying the interest, I don’t think we need see a double dip.”

Yields on the benchmark 10-year Treasury note have traded below 3 percent for most of this month, less than the average of 4.05 percent over the last decade and below the average of 5.48 percent when the U.S. was running budget surpluses between 1998 and 2001.

--With assistance from Scott Hamilton in London. Editors: Fergal O’Brien, Eddie Buckle

To contact the reporters on this story: Jennifer Ryan in London at jryan13@bloomberg.net; Francine Lacqua in London at flacqua@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net


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