Return flight to safety

The debt ceiling crisis

By Biodun Iginla, BBC News and The Economist

Jul 28th 2011, 9:35

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THE markets probably don't have much time for irony. But as the deadline for the debt ceiling approaches, there are some nice echoes of 2008. Remember how the money market funds sparked a crisis as, thanks to their exposure to banks and structured debt, they threatened to "break the buck"? As investors panicked, the money market managers shifted into Treasury bills, driving down yields at the short end into negative territory.

So what is happening now? As the FT reported yesterday, fund managers are avoiding those Treasury notes that expire in August and stockpiling "cash". But what does cash mean in this context? They won't be hoarding notes and coins. It means they will be putting money in liquid bank deposits, reversing the flow of funds seen in 2008.

And the irony doesn't stop there. The reason the US government finances have deteriorated is down to the credit crunch that resulted from the poor lending practices of the banks. And what makes the banks a safe bet now? The assumption that the US government stands behind them. So fears of a US default are causing investors to shift money to institutions underwritten by that same government.

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