US Companies to Take Defensive Action If Debt Ceiling Fails to Rise

Half of US companies are likely to take defensive actions, such as cutting spending and freezing jobs, if the Congress and the White House fail to reach an agreement on the federal debt limit and the US government defaults on its obligations, new data show. A July survey by the Association for Financial Professionals (AFP) also shows that the current debate about raising the US debt ceiling will impact short-term investment strategies and access to capital at US-based organisations.

The AFP Survey on raising the US debt ceiling focused solely on possible impacts on organisations’ investment strategy and access to capital, not on the debate between spending cuts and higher taxes, representing the viewpoints of the corporate finance departments of US-based organisations. The survey was an outgrowth of the 2011 AFP Liquidity Survey.

“We are seeing the tip of the iceberg two weeks out,” said Jim Kaitz, AFP’s president and chief executive officer (CEO). “If anyone is wondering whether there is real world impact to the budget impasse, US corporations are telling us that they will have to take defensive action that will only have a negative impact on the job market and the economy.”

Kaitz pointed to the types of defensive measures companies said they would take, which include spending reductions, hiring freezes and layoffs. Companies told AFP they would delay payments to vendors or tighten credit for trading partners, which would put further stress on downstream partners. Significantly, they also indicated that they would further divest of Treasury securities.

The pricing of US Treasury securities has a direct impact on both the supply and cost of capital available to businesses. Yields on Treasury securities serve as the risk-free rate-of-return in the pricing of bank credit and other forms of capital. Should the risk-free rate rise significantly, the cost of capital for many businesses could also rise sharply, with market disruption a possibility.

Survey respondents saw three significant changes at the corporate level if the debt ceiling is not raised in time:

1. Defensive actions: over half of those surveyed would likely take one or more defensive actions, such as reduced capital spending, hiring freezes/reductions, and lengthened payment cycles to vendors.
2. Investment changes: nearly a quarter of organisations holding Treasury securities would liquidate some/all of these holdings. Treasury securities are one of the three investment vehicles (including money market funds and bank deposits) in which companies place most or all of their short-term investments, according to recent data from AFP members.
3. Access to capital: 52% of financial professionals anticipate negative effects on their organisations’ access to capital, including increased costs/decreased availability of debt bank financing and bank credit.

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