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Banks Start Thinking About a Worst-Case Default Scenario

NEW YORK ( TheStreet) -- Unless Congress can agree on a deal, on Oct. 17 the U.S. government could hit its debt ceiling and not be able to pay what it owes.

Normally it's just a date on the calendar stuck innocuously between Columbus Day and Halloween. This year, it's the date the U.S. Treasury Department says it's basically broke (it will have about $30 billion in cash, and any tax money that happens to roll in).

It's hard to imagine Washington pols won't agree to a deal before then, but one bank isn't taking any chances.

According to The Financial Times, banks are stocking up on cash in their ATMs in anticipation of a government credit default.

One senior executive told the Times that his bank was putting 30% more cash than usual in its ATMs. The reasoning is simple: With the government out of money, a worst-case scenario has Americans making a run on banks in anticipation of a collapsing economy. The Treasury Department says the economic fallout from a credit default could be a freeze in global credit markets, a falling U.S. dollar and rising interest rates.

Again, that's the worst-case scenario, but it's one banks take seriously. An article in The New York Times shows Treasury data revealing a default could lead to "a financial crisis and recession that could echo the events of 2008 or worse."

Other banks are taking special precautions for customers who rely on government checks for their primary source of income (mostly Social Security recipients.)

If those checks were to be cut off in late October and November, these banks would waive overdraft fees and allow customers access to interest-free cash until their government checks resume.

Officials at major U.S. banks say they doubt the U.S. will be bouncing checks anytime soon.

A research note released by Morgan Stanley (MS) this week notes that there have been 17 government shutdowns since 1976. Their message clients is to not panic, and that the economy will weather this storm, as it has the previous 17 storms.

"We believe there is a zero percent chance of a federal government default at this time," Morgan Stanley told clients. "The U.S. government will pay its bills."

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