Half of U.S. 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 U.S. government defaults on its obligations, new data show. A survey conducted last week by the Association for Financial Professionals (AFP) also shows that the current debate about raising the U.S. debt ceiling will impact short-term investment strategies and access to capital at U.S.-based organizations.
The AFP Survey on Raising the U.S. Debt Ceiling focused solely on possible impacts on organizations’ 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 U.S.-based organizations. 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 CEO. “If anyone is wondering whether there is real world impact to the budget impasse, U.S. 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 U.S. 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 organizations 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: Fifty-two percent of financial professionals anticipate negative effects on their organizations’ access to capital, including increased costs/decreased availability of debt bank financing and bank credit.
ABOUT THE SURVEY
AFP conducted a five-question survey between July 13 and July 15, generating 305 responses. The survey respondents were senior finance and treasury executives from a broad range of companies – typically U.S.-based multinationals with a median of $2 billion in revenues. Download key findings data on http://www.afponline.org/liquidity
ABOUT AFP® (www.afponline.org )
The Association for Financial Professionals (AFP) is the daily resource for a network of more than 16,000 treasury and finance professionals. Headquartered outside Washington, DC, AFP provides members with news, economic research and data, treasury certification programs, networking events, financial analytical tools, training, and public policy representation to legislators and regulators.
AFP's global reach extends to over 150,000 treasury and financial professionals worldwide, including AFP of Canada; London-based gtnews, an on-line resource for the treasury and finance community; and bobsguide, a financial IT solutions network.