News Column

Concern Mounts as Debt Limit Fight Approaches

October 2, 2013

Daily News (South Africa)

economics debt ceiling

Wall Street took the partial shutdown in stride yesterday, but market analysts expected investor patience to run out if it lasts more than about a week as a more worrisome battle looms in Congress over the federal debt ceiling.

Opinions over when the standoff over the budget might end and the extent of potential damage to the economy varied, but most commentators agreed that the impasse would keep the government closed for about a week.

Previous shutdowns have generally been brief - usually just a few days - and the memory of a late agreement to avert the fiscal cliff last year explains to some extent the sanguine response thus far.

But if the shutdown lasts longer and the date when the US debt limit approaches, markets will be unsettled as the need to raise the federal debt limit could make negotiations more divisive.

As many as one million federal employees have been furloughed and the knock-on affect will be felt at companies that do business with the government, such as defence firms and other contractors. Bank regulators, including the Federal Reserve and the Consumer Financial Protection Bureau, remained open because they do not rely on Congress for funding.

The impact of the shutdown was most concentrated in Washington, DC, where the federal government is the main employer.

The shutdown has divided workers into "essential" and "non-essential", bruising egos and leaving many grappling with the financial toll of unpaid leave.

Members of Congress will continue to be paid during the shutdown.

The political crisis fuelled concerns about whether Congress could meet a crucial mid-October deadline to raise the government's $16.7 trillion (R160 trillion) debt ceiling.

A week-long shutdown would slow US economic growth by about 0.3 percentage points, global investment firm Goldman Sachs said. But a longer disruption could weigh on the economy more heavily as furloughed workers scale back personal spending.

Failure to raise the debt limit would force the US to default on its obligations, dealing a blow to the economy and sending shock waves around global markets.

Some Republicans have vowed to make that conditional on defunding President Barack Obama's health care reforms, as they did with the spending bill.

"The real focus for markets is October 17, when the debt ceiling issue will come to the fore again," said Richard Lewis, head of global equities at Fidelity Worldwide Investment.

"... A failure to extend the debt ceiling would stop coupon payments on bonds, creating a technical default that would cause a riot in bond markets," he said. - Reuters

Daily News


Original headline: Shutdown as debt limit battle approaches

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