The International Monetary Fund has warned squabbling US congressmen that it is ‘mission-critical’ the deadlock over the country’s Budget is resolved amid predictions that a possible default by America would trigger a crisis on a par with 2008.
IMF managing director Christine Lagarde said that the stalemate over approving the US budget is at risk of spreading to the upcoming vote on raising the country’s debt ceiling, where failure to approve a rise could lead to a catastrophic default by America on its debt obligations.
Shares on Wall Street tumbled last night as the US ‘shutdown’ entered its third day and investors fretted about the looming debt crisis.
Budget showdown: President Obama has called on the Republican House of Representatives to pass a budget and raise the debt ceiling, but opponent John Boehner (pictured right) wants concessions on Obamacare
The Dow Jones Industrial Average closed below 15,000, down more than 135 points, and the dollar fell against a host of currencies around the world. Japan’s Nikkei also fell overnight.
However, markets still seem to be broadly confident that a resolution will be found and the FTSE 100 was only slightly lower this morning, down 15.10 points to 6,433.94.
Experts warned that failure to raise the country’s debt ceiling poses a far greater risk than the current shutdown.
A US default would wreak havoc on financial markets and the global economy. The US was stripped of its AAA rating in 2011 following an earlier row over the borrowing limit.
Christine Lagarde, managing director of the International Monetary Fund, said: ‘The shutdown is bad enough, but failure to raise the debt ceiling would be far worse, and could very seriously damage not only the US economy but the entire global economy. So it is mission-critical that this be resolved as soon as possible.’
The US Treasury said: ‘A default would be unprecedented and has the potential to be catastrophic: credit markets could freeze, the value of the dollar could plummet, US interest rates could skyrocket.
‘The negative spillovers could reverberate around the world, and there might be a financial crisis and recession that could echo the events of 2008 or worse.’
In the autumn of 2008, Lehman Brothers went bust, triggering a credit crisis on financial markets and sending economies across the world into a recession from which they have still not fully recovered.
Market players have previously regarded a US default as unthinkable due to the potentially dire consequences – the global financial system operates on the assumption US government debt is safe because the country will always pay its bills.
But President Barack Obama issued a stark warning to Wall Street bosses in recent days that they shouldn’t necessarily expect the Republican-controlled House of Representatives to raise the debt ceiling and avoid America defaulting.
Republicans are currently dominated by a hardline group bitterly opposed to his new health law, known as Obamacare, and they are determined to gut it in exchange for supporting the budget or increasing the debt limit.
Obama and the Democrats have so far refused to negotiate over Obamacare, while the Republicans have repeatedly passed budget resolutions with controversial clauses that defund or delay measures extending healthcare to more Americans.
In recent days, a breakaway group of Republican moderates have called on their leaders to allow a vote on a ‘clean’ budget resolution that doesn’t include measures attacking Obamacare.
This would enable a majority alliance of moderate Republicans and Democrats to pass a budget and end the deadlock. But Republican leaders are baulking because this would split their party, many of whom are die-hard opponents of Obamacare.
Slump: The Dow Jones Industrial Average closed below 15,000, down more than 135 points
What does the City say?
‘The deadlock over the budget is of minor importance; the major issue is the debt-ceiling deadline, and if relations haven’t improved by mid-October we could be looking at another downgrade,’ said David Madden, an analyst at IG.
‘The partial shutdown in the US is starting to take its toll: the jobs report will not be announced…due to the bickering between both parties.’
Jonathan Sudaria of Capital Spreads said traders were beginning to price in the possibility of a US default.
‘Whilst the repercussions of a shutdown didn’t seem to worry markets too much, the rigid stubbornness from politicians has traders fearing that the same uncompromising mentality will carry over to the debt limit debate.’
Michael Hewson of CMC Markets said: ‘As we move into day four of the US government shutdown, the reality of the situation finally appears to be registering with investors that a quick solution may still be some way off, though we did see a late pullback from the lows of the day on talk that Republican House leader John Boehner was determined to do all he could to avert a government default.
‘There was some suggestion that he might be prepared to push a bill through to end the budget deadlock and raise the debt ceiling with the help from the moderates within his own party and all the Democrats in the chamber, in defiance of the majority of his party, though it seems that this would probably only happen much nearer the October 17 deadline.’
But he added: ‘For now markets aren’t pricing in the unexpected, because if they were, you would have to think that stock markets would be a lot lower, and gold would be higher. The longer the impasse goes on the more likely this current stock market weakness could start to accelerate.’
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