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 |  Subject: Debt clock ticking, but default damage already unfolding :Stock markets around the world hold their breath  Wed Oct 16, 2013 10:53 am | |
| Debt clock ticking, but default damage already unfolding :Stock markets around the world hold their breathon October 16, 2013Posted In: Financial Collapse, Usa October 15, 2013 – WASHINGTON – The warnings from Wall Street are dire: A stomach-turning dive in the stock market. World economies in peril. Another recession in the United States. A replay of the 2008 financial crisis — or worse. And the date investors are worried about is fast approaching. It’s Thursday, when the United States bumps up against the $16.7 trillion limit set by Congress for the amount of money the government can borrow. Why the alarm? If Congress can’t make a deal and raise the limit, the value of United States government debt — the paper considered the safest investment on earth, the grease for the machinery of the world financial system — will be called into question. As the clock clicks toward Thursday’s deadline, signs of damage are already emerging. The Chinese, who hold more U.S. debt than any other country, have wondered aloud whether it’s time to take their money elsewhere. Consumer confidence has dropped — never a good sign with the holiday shopping season coming. And this was the warning to the Senate last week from the president of the National Association of Realtors: “It’s going to go backwards very, very fast.” He was talking about the housing market — buyers and sellers are getting nervous and canceling deals — but he might have been talking about the entire looming catastrophe if the country hits the borrowing limit. So when do things get bad? No one knows for sure, which is part of what makes Wall Street nervous. Jack Lew, the secretary of the treasury, has warned that on Thursday the government will exhaust its authority to borrow money and have only about $30 billion in cash on hand. On a busy day, the government owes as much as $60 billion in legal obligations authorized by Congress. So the government is already running on fumes. Of course, the United States Treasury isn’t a one-way account. Checks roll in every day from tax payments, including yours. The immediate problem is that the amount of money that flows into and out of the government every day swings wildly. A lot comes in around the quarterly tax deadlines — the last was Sept. 15. A lot goes out at the first of the month for Social Security. To smooth things out, the Treasury borrows on the bond market. It accepts loans from investors, who get bonds and bills in return. That paper guarantees the holder that the government will pay the money back, plus interest. And because the United States always makes good on its bond payments — exceptions being when the country was broke after the War of 1812 and because of a paperwork glitch in 1979 — American government debt is considered the safest investment anywhere. If the government is suddenly unable to make interest payments, the value of that debt suddenly drops. The government might be able to delay the interest payments while this gets worked out in Congress. But any delay would cause damage by itself because it would dent the creditworthiness of the U.S. government, the same way your friend would consider you less creditworthy if you “delayed” paying back the $10 he lent you for lunch. The people who determine the creditworthiness of the United States are the three big rating agencies. One of them, Standard & Poor’s, caused a shock to the financial markets in 2011, the last time Congress messed with the debt limit, by stripping the U.S. of its top-notch AAA credit rating. There’s every reason to believe further downgrades are in store if the government defaults. And some investment funds are barred from holding anything less than top-rated debt, which means they could dump U.S. debt and cause its value to plummet. The Federal Reserve cannot accept defaulted securities as collateral. And trillions of dollars of other financial contracts are built on the bedrock of Treasury bonds. It doesn’t take much of a tremor to start breaking windows. -NBCAmerica enters the final hours before catastrophic debt default
- Ratings agency Fitch put America’s prized triple-A rating on negative watch
- Fitch: political brinkmanship risks US being unable to pay its bills and threatens the dollar
- FTSE 100 Index opened in negative territory today after Wall Street investors took hammering last night
- US politicians have until tomorrow to raise $16.7tn (£10.4tn) debt ceiling – lifting the cap on how much it can borrow
- Row over debt ceiling comes amid partial government shutdown in the US
- IMF warns that a US debt default threatens to trigger global recession
Global markets were on tenterhooks today as the United States edges to the brink of a dangerous debt default which threatens the global economy.Ratings agency Fitch placed America’s prized triple-A rating on negative watch and said political brinkmanship risks the US being unable to pay its bills and threatens the dollar, as tomorrow’s debt deadline looms large.The FTSE 100 Index opened in negative territory today after Wall Street investors took a hammering last night, with the Dow Jones Industrial Average closing down heavily, while Asian markets also suffered.However, the dollar rose against the yen today but fell against most other major currencies on renewed assurances from American lawmakers that a deal to avert the default and reopen the partially shut government was within reach.Scroll down for video and real-time markets data Ratings agency Fitch placed America’s prized triple-A rating on negative watch and said political brinkmanship risks the US being unable to pay its bills. Above, Barack Obama discusses the crisis with (from left) House Minority Leader Nancy Pelosi, Representatives James Clyburn and Xavier Becerra yesterday  House Minority Leader Nancy Pelosi speaks with reporters outside the White House. The row over the debt ceiling comes amid a partial government shutdown in the US‘The markets appear nonplussed for the time being as “headline fatigue” has clearly crept in and perhaps the greatest surprise to any US budget deal may simply be a tepid reaction by the market as most of the news appears to be priced in,’ said Boris Schlossberg, managing director of FX Strategy at BK Asset Management in New York.All but the most essential services have been closed since the new financial year started on October 1, after warring politicians failed to agree a budget for the next 12 months.More…
- Now the Democrats demand a ransom: Senators demand spending cuts are axed in any deal to end shutdown
- Dollar tumbles as US Senate tries to thrash out deal to raise debt limit and avert global financial calamity
- ‘It’s basically done’: Senate Democrats take control again a day before ‘Armageddon’ after House GOP plan crashes, no longer lamenting that their own talks had ‘all fallen apart’
- ALEX BRUMMER: The terrifying prospect of a US debt default
They have until tomorrow to raise America’s $16.7trillion (£10.4trillion) debt ceiling – lifting the cap on how much it can borrow.Otherwise they risk the government of the world’s biggest economy being unable to honour IOUs on Treasury debt, or pay staff wages or benefit payments to veterans.The US government shutdown caused by the deadlock, which has seen thousands of staff told to stay at home and closed government departments and museums, is set to enter its 16th day. Many market commentators still hold out hope that reason will prevail and Democrats and Republicans will reach a deal at the last minute.But another reason for pessimism was that any deal reached this week might simply set up another showdown a few weeks or months down the road.US Treasury secretary Jack Lew has warned the country will only have about $30billion (£18.8billion) of cash reserves left – around the current market value of British Gas owner Centrica – if politicians cannot agree to raise the debt ceiling by tomorrow.‘If we have insufficient cash on hand, it would be impossible for the United States of America to meet all of its obligations for the first time in our history,’ said Mr Lew. Talks: Jim Yong Kim, (left), president, World Bank Group, and Christine Lagarde, International Monetary Fund (IMF) Managing Director, talk last Friday before a meeting of the Development Committee during the World Bank/IMF Annual Meetings in Washington A US Marine holds a flag during a rally at the National World War II Memorial yesterday in Washington, calling for an end to the partial government shutdown RUSSIA KEEPS FAITH IN USRussian policy makers expressed confidence today that US lawmakers would resolve the debt impasse, saying they viewed Treasury bonds as the world’s safest investment even in the event of a technical default.
Finance Minister Anton Siluanov told reporters that Russia would not be affected if Congress fails to raise the debt ceiling by tomorrow’s deadline because it holds no short-term US government securities.
Ksenia Yudayeva, first deputy chairwoman at the central bank, described the risk of a US default as ‘very low’.
‘U.S. Treasuries will remain the safest asset in the world even in the event of a US technical default,’ she said.
To deal with any market volatility that may arise, the Russian central bank would roll out its standard range of liquidity provision measures, Yudayeva told reporters after she and Siluanov testified before a parliamentary committee.
Russia holds more than two-fifths of its foreign reserves in U.S. Treasuries.
The central bank’s total gold and forex holdings are just over $500billion.
While America would be unlikely to run out of money instantly, it would have to prioritise debt payments, such as an interest payment on its debt due on October 31, meaning other bills could go unpaid.The deadlock has driven up the cost of US government borrowing and hurt the dollar.The International Monetary Fund (IMF) has warned that a US debt default threatens to trigger a global recession.Fitch said that while it continues to believe an agreement will be reached to raise the debt ceiling and avoid a default, the delays threaten America’s debt rating and could trigger a downgrade.‘The political brinkmanship and reduced financing flexibility could increase the risk of a US default,’ it said.Fitch added: ‘The US risks being forced to incur widespread delays of payments to suppliers and employees, as well as social security payments to citizens – all of which would damage the perception of US sovereign creditworthiness and the economy.‘The prolonged negotiations over raising the debt ceiling risks undermining confidence in the role of the US dollar as the pre-eminent global reserve currency by casting doubt over the full faith and credit of the US.’Obama meets with senior Democrats from Congress The Grand Canyon re-opened on Saturday after it was closed during the federal government shutdown Steven Ahrenholz, a Federal worker put on temporary unpaid leave, protests outside the Department of Health and Human Services CDC offices yesterday Republicans and Democrats are reportedly close to an 11th-hour deal which would avoid a default, and will hold meetings today in the hope of striking an agreement to satisfy both parties.Delays have been triggered by disagreement over President Barack Obama’s landmark healthcare insurance reforms.Craig Erlam, market analyst at currency brokerage Alpari, said: ‘As it stands though, investors remain convinced that a deal will be done before tomorrow’s deadline.’But he added: ‘The damage being done in Congress right now may not be instantly felt, but may be irreversible further down the line.’ Republicans and Democrats are reportedly close to an 11th-hour deal which would avoid a default, and will hold meetings today in the hope of striking an agreement to satisfy both parties. Above, the Capitol, home of US Congress CALM BEFORE THE STORM: WORLD STOCK MARKETS WAIT Traders work on the floor of the New York Stock Exchange World stock markets fluctuated between gains and losses today as a deadline for divided U.S. lawmakers to agree on a higher government borrowing limit drew ever closer.Unless Congress acts by Thursday, the government will lose its ability to borrow and will be required to meet its obligations by relying on cash in hand and incoming tax receipts.That could mean the U.S. is unable to repay holders of Treasury bills that mature in coming days, or that it could miss interest payments on longer-dated Treasurys, and would be in default on its debt.In early European trading, the FTSE 100 was down 0.4 per cent at 6,521.86 and Germany’s DAX fell 0.1 per cent to 8,792.94.France’s CAC-40 was 0.7 per cent lower at 4,226.88.But U.S. stock futures made modest gains, auguring well for trading on Wall Street. Dow futures were up 0.4 per cent at 15,155 and S&P 500 futures also gained 0.4 per cent, to 1,699.30In Asia, Japan’s Nikkei 225 rose 0.2 per cent to close at 14,467.14 while Hong Kong’s Hang Seng dropped 0.5 per cent to 23,228.33. China’s Shanghai Composite fell 1.8 per cent to 2,193.07. Australia’s S&P/ASX 200 added 0.1 per cent to 5,262.91.Stock indexes in Singapore, Malaysia, New Zealand and the Philippines eked out modest gains.‘The market is still relatively calm waiting for the storm to hit tomorrow, when the U.S. will reach its debt ceiling and then default will follow and all hell will break loose,’ said Francis Lun, chief economist at GE Oriental Finance Group in Hong Kong.‘Everybody is thinking the inevitable now. It is inevitable that the U.S. will miss an agreement before the deadline,’ he said.On Wall Street yesterday, stocks were flat or down all day but the size of the losses waxed and waned depending on which politician was giving a press conference about the budget impasse.The market closed with its first loss in a week. Yields on short-term government debt rose sharply as investors worried about the possibility of a default.In the energy markets, benchmark crude for November delivery was steady at $101.21 a barrel in electronic trading on the New York Mercantile Exchange.The euro rose to $1.3532 from $1.3522 late Tuesday in New York. The dollar rose to 98.41 yen from 98.22 yen.  The price of oil has swung back and forth for two weeks as lawmakers attempt to resolve the impasse. Above, oil drillers in the Appalachian Mountains of eastern Kentucky Oil steady above $101 as US debt deadline nearsThe price of oil held above $101 a barrel today as the deadline for U.S. politicians to raise the government debt ceiling – and avoid a potentially catastrophic default – is only hours away.By early afternoon in Europe, benchmark crude for November delivery was up 3 cents at $101.24 a barrel in electronic trading on the New York Mercantile Exchange. The contract fell $1.20 to close at $101.21 on Tuesday.The price of oil has swung back and forth for two weeks as lawmakers attempt to resolve the impasse.‘The uncertain economic conditions in the U.S. have caused further volatility and nervous trading in the oil market, with investors worrying about a slowdown in the US oil demand,’ said a report from Sucden Financial Research in London.Government agencies including the Energy Information Administration, which keeps track of US crude and fuel supplies, have stopped many services.The EIA’s weekly report on supplies gives an indication about the strength of demand and often pushes the oil price up or down.Also setting a ceiling over prices were talks on Iran’s nuclear programme in Geneva between the Islamic Republic and six major world powers.A deal would likely end US-led economic sanctions, which have greatly reduced Iran’s oil exports over the past couple of years.‘Progress continues to be made and it seems that Iran is proposing a detailed framework rather than philosophical ideas,’ said Olivier Jakob of Petromatrix in Switzerland.Brent crude’s December contract, the benchmark used to set prices for international crudes used by many U.S. refineries, was up 10 cents at $109.52 on the ICE Futures exchange in London. |
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