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The Boston Globe

Business

Wall Street looks to soothe, while preparing for worst

Wall Street is preparing for the government to bounce its first check.

The government is partly shut down, but a bigger concern for financial executives is a potential default on public debt should Congress fail to raise the nation’s borrowing limits. Financial companies are making some early preparations, just in case.

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The pivotal date is in less than two weeks. The Obama administration has said that on Oct. 17 it will no longer be able to finance government obligations without raising the $16.7 trillion cap on government borrowing.

A Treasury Department report released on Thursday said the debt limit impasse could cause credit markets to freeze, the dollar to plunge and interest rates to rise. A default, the report added, could potentially result “in a financial crisis and recession that could echo the events of 2008 or worse.”

A default would make it tough for the Treasury to make good on coming interest payments and other obligations, including paying scores of government employees and financing critical safety net programs like Social Security and Medicare.

Wall Street remains confident a deal to avert default will materialize, according to interviews with senior executives, who spoke on condition of anonymity. The relatively upbeat sentiment grew on Thursday, stoked by reports that Speaker John A. Boehner indicated to colleagues that he was determined to prevent a federal default.

And while Wall Street is sanguine, big banks like Morgan Stanley and Citigroup are working out contingency plans that involve redoubling efforts to keep clients calm and selling US treasuries — a sign that confidence in Washington has waned.

To guard against possible mayhem from a debt ceiling crisis, some of the nation’s largest banks are deploying plans that were developed in 2011 — when the government first looked as if it were on the verge of surpassing its debt ceiling limits.

Most brokers aren’t strangers to the anxiety surrounding the debt ceiling. Just two years ago, the nation faced the same looming prospect of a default, when the government needed to raise its cap on borrowing from $14.3 trillion.

“We have seen this movie before,” said Steven Wieting, the global chief investment strategist at Citigroup’s private bank. Just like in 2011, “this will be resolved,” he said.

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