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FXstreet.com (Barcelona) - HSBC Economists are looking at three possible scenarios on the debt ceiling negotiation, including the “grand bargain”, the “muddle through” and the “default”.

Key Quotes

"A “grand bargain” would have positive economic spill-overs but now seems unlikely. The “muddle through” would, at the least, dent confidence in the short term. And “default” has the capacity to plunge the US back into recession."

"Hopefully, it won’t come to that. We have, after all, been to the brink before and, on each occasion, Washington has been able to step back. Moreover, with no “cross-default” on US bonds, the risk of sudden meltdown is lower than it might seem first sight."

"With increasingly nervous international investors and downside economic risks domestically, it may be that the US dollar will bear the brunt. The euro and sterling would likely appreciate, in the process damaging growth prospects on the other side of the Atlantic. Treasury yields might even end up lower – thanks to protracted economic weakness and a flight from riskier assets such as equities – a puzzling reward for Washington’s political failure.
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