July 29, 2011

Debt Crisis Spooks Investors: Survey

Affluent investors cite concerns over Washington impasse, UBS Reports

Investors are keeping an eye on the debt ceiling fight in Washington, and they don’t like what they see, according to  poll from UBS Wealth Management Americas, which also indicates that investor sentiment has reversed in recent days.

An overnight poll, released Thursday, indicated that pessimism over the short-term future of the economy reigns supreme, reversing a trend that in April showed 53% of respondents to be optimistic. Now 60% are pessimistic, with only 21% believing that in the short term things will improve.

Affluent investors are far too wary of the goings-on in Washington over the debt ceiling to place their trust in the markets just now. Among respondents, 40% said they were awaiting an outcome to the debt standoff before they would consider putting money back into the markets. The lack of a resolution to the debt ceiling situation worries them as well, with 40% highly worried that the nation will actually default.

While the size of the debt worries many in the context of how it will affect their financial goals—65% cite that as a worry, compared to 56% in April—Simon Johnson, former chief economist at the International Monetary Fund (IMF), wrote in a New York Times blog in May that the size of the debt itself is not the concern, nor is the need to cut the deficit as immediate as the current debate would have it. In fact, he says, “the total Treasury debt outstanding since 1950 has fluctuated between 30% and 90% of GDP, with the debt-revenue ratio never worse than 5 to 1—and in recent decades between 2 to 1 and 3 to 1.”

Instead, says Johnson, the important factor to consider in the debate is the debt/revenue ratio, because that determines whether a country can continue to pay its obligations. “Very few countries default because they can’t afford to pay their debts, either to their own citizens or to foreigners,” he says. “Defaults occur when the political process in a country determines that, for whatever reason, the government cannot raise sufficient revenue.” And with the lack of compromise over tax increases in the current debate, that is the crux of the matter.

Jonson adds, “The real issue is how much relatively rich people are willing to pay, and on what basis, in the form of transfers to relatively poor people—and how rising health-care costs should affect those transfers.”

Robert J. McCann, UBS WMA CEO, said in a statement about the survey results, “Whether we’re talking to and advising a corporate chief executive, a high-net-worth investor or a small business owner, it’s clear that uncertainty over the U.S. debt has frozen everyone in their tracks when it comes to actively participating in the market. What our clients need now is someone they trust to help them navigate this uncertainty and help them understand the issues affecting this economy.”

 

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