Wall Street sinks on default fears

As the US government shutdown enters its second week, the political deadlock looks frustratingly far from being broken, while the Treasury’s 17 October deadline draws ever closer.

Rather than bringing closer any resolution to the impasse in Washington, the weekend saw a re-emergence of political vitriol, with Republicans and Democrats blaming each other for the stalemate.

The failure to make any headway has led to a nervy session on Wall Street. By early afternoon in New York, the Dow was down 0.58% at 14,985, while the S&P dropped 0.5% to 1682.0.

Despite saying on Friday that ‘this isn’t a damn game’, House Speaker John Boehner claimed yesterday that a clean bill to raise the debt ceiling (that is, one without spending conditions attached) would fail. ‘The votes are not in the House to pass a clean debt limit,’ he said and warned that the country was on a path to default. Other representatives have been reported as saying that such a bill would likely garner enough votes to succeed though.

If Congress fails to agree an increase in the debt ceiling, causing the US to eventually default on its debts, it would be disastrous for the global economy. Because such an outcome would be so highly damaging, it is doubtful that the political players involved will allow it to transpire. Moody’s rates the changes as being ‘unlikely’.

It’s worth bearing in mind that 17 October is Treasury Secretary Jack Lew’s estimate for when the US would be left with around $30 billion in cash. That would probably allow a few more days before the US runs out of funds to pay its bills.

When Congress dragged its heels over raising the debt ceiling in 2011, S&P downgraded the US from a rating of AAA to AA+. S&P has suggested the shutdown and the debt-ceiling impasse is unlikely to affect its rating of US debt, on the proviso that the wrangling does not last too long.

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