lunes, 30 de septiembre de 2013

Markets focus on the US...

The US fiscal year runs from October 1 - September 30. Hours before the fiscal year is to end, the country still doesn't have a budget.

Tomorrow, October 1, parts of the US Government will shut down unless Congress approves a continuing resolution by midnight tonight. That could happen but, if it doesn't, it wouldn't be the first time the US has begun the fiscal year without a budget in place. We've danced this dance 18 times since 1977. The average shutdown last 6.5 days. The last shutdown took place nearly 18 years ago during the Clinton Administration. The longest ever, it lasted 21 days.

What's the impact of a government shutdown on the economy? Historical experience tells us the median reduction in the growth rate during the quarter the government was shutdown was 0.9 percentage points. That's rather significant in a year when the economy is expected to grow 1.6%. Naturally, the duration and implementation of the shutdown will influence how deep the hit to growth will be.

This time around, the shutdown is the least of markets' worries. Following hard on the heels of the looming shutdown is the prospect that the US may default on its debt payments. The last time it looked like Congress would not raise the debt ceiling - in August of 2011 - the US lost its AAA debt rating.

The shutdown and the debt ceiling are two discrete events. It's especially unfortunate that the two votes are happening so close together. The shutdown is what will happen if Congress doesn't approve a budget for fiscal year 2014. The vote to raise the debt ceiling is, effectively, voting to pay for what you've bought. By voting to raise the debt ceiling, Congress is authorizing the Treasury to borrow the money to pay for expenditures Congress has already authorized.

When Congress votes on the debt ceiling depends on when the US government exhausts its authorized borrowing capacity. This year, Treasury estimated that date to be October 15. However, juggling payments could win a few extra days or weeks.

Markets can live with a government shutdown. The real concern is whether Congress will raise the debt ceiling. If it doesn't and the Administration doesn't find a way to pay its bills, the US Government will default on its debt. No one wants to find out what the impact on the markets would be if the "full faith and credit" of the US Government were questioned.

No hay comentarios:

Publicar un comentario