Debt Ceiling Woes

Remember 2011? The US economy was under the crisis as it’s debt increased to record levels in 2011 which led credit rating agency S&P to strip off the USA from its AAA rating. 2011 was one of the worst years for the Indian equities and no investor would like to remember it in the lifetime. The US economy is again reaching that feat as the government is required to increase the debt ceiling limit. There are chances that the US may run out of cash in next few weeks.

President Obama is of view that the talks of 2011 should not be duplicated and that the country should pay the bills that have already been incurred. In 2011, the negotiations were long and messy which led to a downgrade by the rating agency. Having learned the lesson from this, President Obama is now trying a new strategy to refuse to negotiate over terms for raising the debt ceiling and leaving it is up to Congress to give government the authority to pay its bills. With no talks going on at this time, the markets there and thus worldwide have become extremely cautious whether a deal can be reached to avoid the government falling behind on its payments.

Obama has called on Congress to raise the debt ceiling by mid-October, after which point the Treasury has said it would become difficult for the government to make its payments. Currently there are no talks between the two parties in Congress on resolving the matter. If the policy hangover continues then the US government would be in a dangerous mode as per the market strategists. According to Credit Suisse, the US government will run out of money by October 24 and estimates that markets could become volatile.

US Treasury Secretary Jack Lew was warned that the country would have to take extraordinary steps to keep the country away from defaulting on its payments by mid-October after which  the treasury department will have less than USD 50 billion in cash on hand, and that won't last long.

The shortfall in the US budget means a end of the good time for the equity markets. The public spending by the government would decline which would be another shock to the global recovery. In USA the consumer confidence has already dipped from the earlier level. The Conference Board’s consumer confidence index for USA for September 2013 dropped to 79.7 in September from a revised 81.8 in August. Hammering of the consumer confidence would probably be worst sign for the US equities and many exporting countries across the globe.

Sensing this, the global markets are again trading in red today. Asian markets have turned red. European equity markets ended their day in green yesterday but there too, one may expect volatile session today. We are of the opinion that the Indian markets would show another flat to negative opening today.