BackShould the US shutdown worry you?
Markets expect that a middle ground will soon be found
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It might sound intensely dramatic, but it is true. The US government has shut its non-essential services starting midnight 30 September leaving about 800,000 federal government employees jobless, at least temporally. Therefore, till the US Congress passes the necessary bills to keep paying these government workers, places such as amusement parks and museums in the US will remain closed. “Unfortunately, Congress has not fulfilled its responsibility. It has failed to pass a budget and, as a result, much of our government must now shut down until Congress funds it again," Barack Obama, President of the US, said in a video message. He also tweeted, “They actually did it. A group of Republicans in the House just forced a government shutdown over Obamacare instead of passing a real budget."
What happened
After much deliberation over the past few days, the Democrats and the Republicans failed to reach an agreement before the deadline to pass the budget ended. The basic issue on which the lawmakers in the US differed is the Affordable Care Act, also known as Obamacare.
As per reports, Republicans, who have a majority in the House of Representatives, want to contain or postpone spending on Obamacare, something that is not acceptable to the Senate where the Democrats are in majority. As a consequence, the political posturing has resulted in a deadlock and the government is forced to shut some of its services because of non availability of funds. It is for the first time since 1996 that such a situation has arisen, but if a middle ground is not found in the coming days, this could start hurting the US economy and have implications on the global financial markets.
What next
In a letter to the US Congress on 25 September, the US department of treasury said that the extraordinary measures being taken by it will not last after 17 October and the department will be left with only $30 billion to meet its commitments.
“This amount would be far short of net expenditures on certain days, which can be as high as $60 billion. If we have insufficient cash on hand, it would be impossible for the US to meet all its obligations for the first time in our history," the letter said. Around the same time, the government will also reach its legal limit of raising debt. Many analysts argue that the current logjam is a prelude to the debt ceiling debate.
If the Congress fails to raise the debt limit, the US government will have to default on its obligations which will unsettle the entire global financial market.
Should you be worried?
In terms of an economic impact, a lot will depend on how long this shutdown lasts and it will have both negative as well as positive impact for a country like India. Says U.R. Bhat, managing director, Dalton Capital Advisors (India) Pvt. Ltd: “We need to worry because anything that destabilizes the global financial market is not good for us. But the positive aspect is that with uncertainty in the financial market, the QE (quantitative easing) may continue, which will give India the time to make necessary adjustments." While the economic downside will depend on how long the US Congress takes to find a middle ground, the US Federal Reserve may not want to start reducing its bond buying programme in this environment. “The impact will depend on how long this (the shutdown) continues. The US economy may suffer, but that will also mean that QE taper will not happen this year and that is a positive for India and other emerging markets," said Andrew Holland, chief executive officer, Ambit Investment Advisors Pvt. Ltd.
At the moment, the financial market is not looking particularly worried as it is probably factoring in a compromise between both US political parties and is convinced that the debt ceiling will be raised within time. “The more critical issue is of debt ceiling. Though it is near-impossible that the US will default, but the uncertainty might lead to rise in bond yields," said Madan Sabnavis, chief economist, CARE Ratings.
Can a similar situation arise in India?
Technically, yes. If Parliament fails to pass the budget, the government will not be able to discharge its obligations. However, if it happens in India, it will be a much bigger crisis. The passage of budget in the Lok Sabha, the lower house of Parliament, is also a de facto vote of confidence. Rejection of the budget by the house would mean that the government of the day falls which will naturally create a much bigger crisis. However, the government of India does not have a debt ceiling in place, but it has to go back to Parliament if it intends to spend more than what was budgeted at the beginning of the year.
Mint Money take
The markets are expecting that a middle ground will soon be found and the US government will not have to default on its obligations. However, if the US lawmakers fail to settle their issues in time, it could unsettle the global financial market which will have implications on the Indian markets too.
Credit ratings will be downgraded for the US, bond yields will rise, every risky asset will be re-priced and with the US government having insufficient funds to spend, the US economy will slip into a recession in no time. Things can actually get a lot worse than one can imagine. But the hope is that all this will be averted.
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