May 29, 2024

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Fear of “lockdown” is another risk to the market: look at the consequences of the new US government shutdown

Fear of “lockdown” is another risk to the market: look at the consequences of the new US government shutdown

Capitolio – Closure (Photo: reproduction)

São Paulo – Another risk factor has entered the global markets’ radar in recent sessions.

With tensions rising in the US Congress amid political division, Democrats and Republicans are still unable to agree on a bill that avoids a so-called “shutdown” and raises the debt ceiling until 2022.

Simply put, a “shutdown” is a government shutdown. It happens because the budget for the current fiscal year is not approved. In this scenario, the government is no longer able to commit to any spending, resulting in a freezing of government services and activities until the budget is approved.

The United States must by next Thursday (30) approve the government’s funding budget, at the risk of halting federal services.

At an event last Wednesday (28), Janet Yellen, the US Treasury Secretary, warned that without raising the debt ceiling, the US would have its first default in history, calling on Congress to act in harmony with the administration of President Joe. Biden to find a way to raise the federal spending cap.

“Without raising the ceiling, the United States will have limited resources on October 18 and will have the first default in its history, which will lead to a crisis and depression,” Yellen commented. While the government needs new money to remain “open,” the government also needs congressional approval to raise the Treasury to pay its obligations.

“It is essential to avoid a catastrophic event,” Yellen added. “I hope we will work with Congress to avoid a catastrophe.” The minister also noted that waiting until the last minute for a deal “could seriously damage business and consumer confidence, raise the cost of borrowing for taxpayers and have a negative impact on US credit ratings in the coming years.”

As XP points out, to complicate the picture for a $3.5 trillion social package, Republicans say they will not vote to raise the ceiling and have indicated that this should be done by reconciliationAny mechanism that allows measures to be approved by a simple majority in the Senate. However, Democrats continue to resist this path.

The evidence also indicates that with the Democrats proposing to suspend the debt ceiling, which Republicans are still blocking, the chances of a partial shutdown of the general mechanism in October and even non-payment of debt coupons by the US government as explained by Jerome Powell, chair of the Federal Reserve, Willen.

“Thus, although investors place a low probability of the worst of things happening, the difficulty that has become apparent in negotiations contributes to adding caution to an already risky growth scenario,” assesses the analysis team.

An avoidable crisis

In the assessment of Levante Ideias de Investimentos, the American political split could, within three weeks, lead to a completely avoidable international crisis. He estimates that “if the US Senate does not approve a formality, the increase in the public debt ceiling, the impact on the financial market will be devastating for the entire world, including Brazil.”

The research team’s analysis team shows that the US government has not recently spent more than it collected, with the situation worsening as the epidemic fights. This has caused an accelerated increase in the public debt, mandated by Congress. There is a maximum debt limit (“debt ceiling”), as well as in Brazil there is an expenditure cap that was established in 2016.

Analysts estimate that the Republican opposition’s intent is to leave the political burden to sign a mandate for the government to take on more debts to the Democrats.

Technically, the cap was reached on August 1, but the Treasury is taking extraordinary measures to increase that limit. However, as indicated above, the Treasury itself estimates that on the eighteenth of this month there will be no more money to pay expenses and interest on debt. The debt limit, which only Congress can raise, prevents the US from issuing new debt above its current high of $28.4 trillion.

“Without an increase in debt ceiling, the treasury will be in an unsustainable position. To honor the interest on the bonds, he would have to refrain from paying military salaries and pensions to retirees. This would immediately open the way for legal challenge, as retired lawyers question that their rights are no less than those of government bond holders,” assert the analysts.

By law, the government is required to pay expenditures on time, pay interest on public debt and respect the debt limit. Given the situation, these three conditions – which ultimately conflict – could cause the US government to default on its obligations.

Analysts also point out that as long as there is no clear definition of raising the debt ceiling, which is common in normal times, US bond prices will be subject to high volatility.

They stressed that “Treasury bonds, the US federal bond, which is considered the safest investment in the world, can be considered risky.”

Levante also notes that the crisis will extend beyond the borders of the United States, with the dollar, the global reserve currency and much of the global financial system, based on the assumption that Treasuries are risk-free. “If this fact were to be questioned, the resulting crisis would be enormous,” he added.

American consumers will face higher borrowing costs, making everything they buy with debt — homes, cars, anything with a credit card — more expensive, ending any expectations of an economic recovery.

In this scenario, time for the government and Congress is running out. Senate Democratic leader Chuck Schumer said Wednesday that the country’s Senate could vote on an interim budget bill that then needs House approval before Friday.

“The Senate can act today to respond to a concern that requires the immediate attention of this room: federal government funding after September 30,” Schumer said. The voting schedule has not yet been determined.

Schumer is seeking a partial solution, separating discussions and passing a bill to continue funding government operations from Friday, to extend the debate on raising the cap into October.

last shutdown

It should be noted that the last shutdown occurred for 35 days from December 2018 to January 2019. This was the longest shutdown in US history. Democrats were taking a majority in the House of Representatives after the 2018 midterm elections, when Trump announced he had not signed a bipartisan short-term spending bill over the infamous construction of the wall on the border with Mexico.

Democrats refused to provide money for the measure. After hundreds of flights were grounded, Trump relented and signed a bill without his demands.

The nonpartisan Congressional Budget Office (CBO) estimated the cost of the shutdown at about $3 billion in economic activity. The CBO reported at the time that some companies would “never recover” their lost income.

The Washington Post notes that in the event of a shutdown, presidents can make some decisions about what is deemed essential to national health and security and to keep these programs running. This can open up some decisions that are political in nature.

In the present case, “closure” can be far-reaching. In the past, layoffs affected only a few agencies because Congress had already approved funding for some. But that pause would be complete, because Congress hasn’t passed any funding bill. In this way, the negotiations of the US Congress will be closely watched by investors.

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