US government shutdown looming for investors
Updates from the US government shutdown
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The “debt ceiling” trap looms for the Biden administration and supporters of its $ 3.5 billion social spending program. The same goes for the markets.
Under a July 2019 agreement, the debt ceiling law was suspended until August 1 of this year. Now that the law is back in force, Democrats and Republicans may be underestimating the problems this could cause.
New US Treasury borrowing is not allowed unless a new “debt ceiling” law is passed that allows borrowing above the existing level of about $ 28.5 billion.
This means that the government must at some point do a partial shutdown without, at a minimum, a new debt service law and a short-term “rolling resolution” for funding.
Even without new programs, spending on operations such as flood relief, combating Covid-19, and removal and resettlement from Afghanistan will run up against the debt ceiling. Treasury Secretary Janet Yellen has estimated the “X” date when the government will run out of cash in October.
It does not matter a reconstruction of society with better infrastructure and more equity. The government may have to suspend hundreds of thousands of employees and contractors without pay.
Mitch McConnell, the leader of the Republicans in the Senate, who formally opposes the administration’s program of taxes on the rich and spending on climate, health and social equity, has offered no help to make spend an increase in the debt ceiling.
It only offers a short-term “continuous resolution” until the actual appropriations are passed by both houses and enacted into law. McConnell has the voices to block an increase in the debt ceiling if he and his allies are not happy with the tax and spending package.
And at the end of the day, he indicated that after this short resolution continues for about a month, credits for social spending and taxes on the rich (or carbon) will not be anything like $ 3.5 billion. dollars. They may be half of that, which Conservative Democratic Senator Joe Manchin would have spoken in private. This gap between offer and offer announces a long legislative fight.
All of this uncertainty has the potential to have a disruptive effect on markets around the world.
We got a glimpse of the risks and actions the Fed can take from a transcription central bank Federal Open Market Committee teleconference on October 16, 2013.
It was released in January 2019 and is the most recent published account of emergency “actions” the central bank plans to keep markets open in the event of a shutdown, according to a person familiar with the matter. Yellen and current Fed Chairman Jay Powell were on call as board members.
According to the transcript, the board was updated on a joint memo that details nine “actions” under the contingency plan. The first seven are now standard Fed market tactics, including so-called reverse repo transactions – lending Treasury securities to others to use as collateral.
However, other actions are listed as more controversial. Action 8 would remove Treasury securities with delayed or potentially delayed payments by buying them directly on behalf of the Fed.
Action 9 would trade bonds of clients or brokers who are about to default with bonds in the Fed’s portfolio that have subsequent interest or principal payments.
Powell said such actions would be “disgusting” to take because it would mean the Fed would enter a “difficult political world,” appearing to make the problem go away. But he said in extremis that he would not exclude them.
The Fed’s board would also need the Treasury’s approval to extend any delayed principal payments one day at a time, no later than 10 p.m. every day until the ceiling of the debt is fixed.
People in history and in the market tell me that this process would “tamper” with Treasury securities that are at risk of maturing during a shutdown. Investors would avoid them, and clearing house operators for financial products would at least “haircut”, or discount, the value of treasury bills as collateral for transactions. This would block the markets for interest rate and currency products.
As a US General Accounting Office report on the 2013 shutdown detailed: “The managers of one of the largest derivatives exchanges in the world have declared that they have asked their counterparties not to use (as collateral) Treasury securities whose principal or interest is due in mid-October.
A closure and freeze on the debt ceiling seems likely to create disruption in the collateral markets. Sound battle stations.