Friday, October 11, 2013

US debt ceiling: What we wake up to on October 18

One cannot rule out the possibility of some sort of a technical default before a compromise is reached on debt ceiling, says Alastair Newton, Senior Political Analyst, Nomura - the one who predicted a red October as early as July.


While India has a total exposure of $59.3 billion to US Treasury Securities, China and Japan have it at $1.1 trillion each as of July 2013, as per the data available on the official website of the US Department of the Treasury.

But there's no worry on this front, for now. "I don't mean a default on the US Treasuries," explains Alastair Newton, "... but that we get across the October 17 deadline and the Treasury has to start being selective about which bills to pay."

On what scale would the US government decide on which service to support, and who to neglect - will food assistance for kids take priority over medical care? Will veterans be neglected? No one has answers.

Even as Republicans and Obama play the game of chicken, it's more than just about chickening out for President Obama, especially after having lost face over Syria and Larry Summers. At stake is his key legislative achievement, which is the healthcare bill; and as a recanter, he risks being a lame duck president.

"Obama needs to reassert himself now if he is to avoid looking increasingly like a lameduck president," says Alastair. "It is possible he may show some flexibility on the tax for medical devices as a compromise; but there is no indication of that yet."

For the US economy as a whole, there's much more to it. If not in substance, in papers for sure. "Fitch may downgrade the US anytime in the next few days unless there is some significant progress. Fitch has warned of this," says Alastair.

"All this shenanigans ... in Washington, is having a negative impact on both business and consumer sentiment. That'll feed into economic activity, putting off investment decisions and so on," he says. Workers in America on forced leave have been promised that they'll get their dues, but then that's always a caution.

The Congress has hiked debt limit done so many times since 1960. It has acted 78 times to permanently raise, temporarily extend, or revise the definition of the debt limit - 49 times under Republican presidents and 29 times under Democratic presidents, as per information available on the website of the US Treasury department.

This debt limit is the total money that the US government is authorised to borrow to meet its legal obligations, and NOT to authorise new spending commitments.

Most analysts believe that a last-minute handshake on hiking the debt ceiling is sure to happen, but then the question is why always push it to the edge when a delay has always had an adverse impact on the markets as well as the overall economy, as has happened this time.

"The debt ceiling impasse in 2011 contributed to long-lasting scars on financial markets. The stress in financial markets that developed in August 2011 persisted for many months. Then, as now, the economic expansion was vulnerable to adverse shocks," a report by the US Treasury department notes.

On the same, US Treasury Secretary Jacob J Lew says, "Postponing a debt ceiling increase to the very last minute is exactly what our economy does not need - a self-inflicted wound harming families and businesses.

Our nation has worked hard to recover from the 2008 financial crisis, and Congress must act now to lift the debt ceiling before that recovery is put in jeopardy." What happens if the October 17 deadline is overshot?"

A default would be unprecedented and has the potential to be catastrophic: credit markets could freeze, the value of the dollar could plummet, and US interest rates could skyrocket, potentially resulting in a financial crisis and recession that could echo the events of 2008 or worse.

By looking at the disruptions to financial markets that ensued in 2011," the report notes. Even the possibility of a default could lead to sharp declines in household wealth, increases in the cost of financing for businesses and households, and a fall in private-sector confidence, the report says.

It notes the following owing to the debt ceiling impasse in 2011: Sharp declines in household wealth: Wealth is an important determinant of household consumption spending, and consumption spending accounts for about 70 per cent of GDP.

From the second to the third quarter of 2011, household consumption fell $2.4 trillion.

A fall in private-sector confidence: Consumer and business confidence were falling in 2011, and as the debate about the debt limit progressed, business and household confidence fell to levels that are typically only seen during recessions. It took months before confidence recovered, even though, ultimately, there was no default.

indiatimes.com

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