The US Budget shutdown is fast becoming a debt ceiling brawl and US default fears are on the rise.
And the controversy is impacting consumer confidence, according to private polls. This points to the possible damage a protracted dispute could do to spending, consumption and growth. We will get an early idea on Friday, if the retail sales figures for September are released.
With less than 10 days to the October 17 debt ceiling deadline, Japan and China have warned the US overnight about the rising dangers to the global economy from a possible default.
Seeing China is the biggest holder of US debt securities and Japan is the second, the warnings carry some clout (and self interest). China has around $US1.28 trillion of US debt, Japan, just over $US1 trillion.
The Financial Times reported that in its first official reaction to the budget impasse and looming debt ceiling deadline, Beijing said “the clock is ticking” and urged politicians in Washington to “ensure the safety of the Chinese investments”.
Zhu Guangyao, vice-finance minister, told a media briefing that China has made clear its unease over the political impasse in Washington.
In Japan, the Ministry of Finance is very worried about the potential impact on currency markets, according to a senior official. A US default could cause investors to dump the US dollar, which would sharply push up the value of the yen.
While the official said he was “very confident” such an outcome would be averted, he recalled the “chaos” in September 2008 when the US House of Representatives initially rejected a $700bn bailout of the stricken financial services industry.
Overnight, market concerns rose noticeably about the impact of the current shutdown morphing into the bigger brawl over raising the $US16.7 billion debt ceiling from October 17.
Equities were weak in Asia, Europe and the US where the Dow dipped 137 points or nearly one per cent.
In fact the Standard & Poor’s 500 Index hit a four week low as nervousness increased among investors tat the debt ceiling would cause chaos.
Commodities saw some different moves with gold rising $US15 to around $US1325 an ounce, oil dipped under $US103 a barrel in the US and seems to be tracking lower.
And the Aussie dollar regained the 94 US cent mark after trading above that level yesterday, dipping under in European trading, then firming in the US as the greenback again weakened.
It is now increasingly clear that the tea party hard right Republicans in the House of Representatives are on a collision course with the Democratic White House and he Senate.
President Obama indicated overnight that until the Republican dominated house of Representatives passed the budget and raised the debt ceiling, he wasn’t interested in talking. He said he was willing to talk about spending issues once the Congress had freed the budget and the debt ceiling legislation.
He was replying to comments from John Boehner, the most senior Republican in Washington (He’s the Speaker of the House of Reps), who declared at the weekend that it was “time for us to stand and fight” over the US budget.
Mr Boehner said the Republican majority in the House would not pass bills to fund the government or increase the debt ceiling unless the Obama administration was willing to make concessions on health care and other issues.
He claimed “there are not the votes in the House to pass a clean CR [continuing resolution]”, a reference to the short-term funding measure with no strings attached that would allow the government to reopen. Mr Boehner also said the debt ceiling would not be increased unless the White House addressed long-term spending and budget issues, the FT reported.
But he has been unwilling to allow a resolution allowing the budget to be funded, to be put to the House for fear that moderate Republicans would join with Democrats and approve it, thereby destroying his career.
Both sides know the damage that would be inflicted on the country if the Treasury runs out of money later this month, risking an unprecedented debt default. And the Republicans at the weekend made it clear that don’t care if the US defaults.
The US government made it clear that it would not sell any of its 8,100 tonnes of gold, held in places like Fort Knox. At current prices that’s worth about $US340 billion.
That would only keep the US government going for about a month, but the Treasury fears it would send the wrong message to global markets.
The US government has small holdings of other commodities (such as oil), but would be reluctant to sell for the same reason, and the damage the sales would do to commodity markets.
US media reports pointed out that the default, if it happens, will be limited and wouldn’t happen until around the end of October. There is over $100 billion of debt maturing from October 17 onwards and that could be rolled over into new securities, if the holders agree.
But if default does occur, then the US would join some pretty tatty countries on the global default list.
These include Russia, Angola, Argentina, Cote d’Ivoire, the Dominican Republic, Ecuador, Gabon, Greece, Grenada, Kenya, Liberia, Nigeria, Paraguay, the Solomon Islands, Venezuela and Zimbabwe which have all defaulted or restructured their debt in the past decade and a bit.
And, although many investors claim to be sanguine about the debt ceiling, they also point to a possible (small) silver lining in that the US, Federal Reserve could be forced to wait even longer before reducing its bond buying from $US85 billion a month.
In fact the Fed’s support is the major difference to the August 2011 situation when the US last went close to default.
