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News Analysis: Debt ceiling poses larger threat than U.S. gov't shutdown

English.news.cn   2013-10-02 18:06:38            

by Yang Qi, Huang Jihui

NEW YORK, Oct. 2 (Xinhua) -- Experts warn the debt ceiling would be more serious and disruptive than the U.S. government shutdown, which began on Tuesday and was expected to last for at least a week.


The most obvious impact is a loss of federal employee compensation, as "nonessential" federal workers are furloughed, which would hurt the country's spending and weigh on economic growth.

J.P. Morgan Tuesday said in a note that around 710,000 federal employees are being furloughed and this means a reduction in federal compensation of around 260 million U.S. dollars per day of shutdown, or 1.3 billion U.S. dollars per week.

J.P. Morgan estimated that per week of shutdown will shave about 0.12 percent off the quarterly annualized growth rate of real GDP, and there may be additional effects through confidence and on into consumer spending which are harder to quantify.

In addition, consumption of federal services may decline. The longer the shutdown lasts, the more likely it could begin to affect additional services provided by the government, UBS said in a report on Tuesday.

Moreover, Lawrence White, professor of economics at New York University's Stern School of Business, told Xinhua that people who are planning a trip to national parks during the shutdown will find national parks closed, so tourism in Washington will surely be adversely affected.

He added that an indirect effect would be that people will think the United States doesn't have a reliable government and it adds uncertainty to the U.S. government.


Experts generally believe the shutdown is unlikely to be resolved in a week as both Democrats and Republicans seem to stick to their stance.

Very few people think that this will last less than a week. "This could easily stretch into three or four weeks," said Ken Goldstein, an economist at the Conference Board, in a phone interview with Xinhua.

Goldstein doubted the government could go back to business in a week. The administration said they would not attach any change to the Affordable Care Act, or ObamaCare, while the Tea Party and many Republicans fear once the act comes into effect it will grow too much to afford.

Both the daily economic and political impact would pile up and at some point the pressure would force either party to crack, Goldstein said, adding that it is more likely to take more than a week or two than a day or two for that pressure to build enough to force that crack.

This is the first time in 17 years that the U.S. government has been shut down, but some people think it will last for a few weeks this time.

Experts pointed out the government shutdown would delay the Federal Reserve's decision of tapering the quantitative easing program.

With the ongoing government shutdown, which could well last into late October, the chance of the federal government to ease in October is close to zero, Goldstein said.

UBS suggested if the tapering in October becomes unlikely, it expects the Fed to taper by January.


Although the two parties could afford to let the government shut down, they absolutely would not belittle the debt ceiling, as the consequences would be much more serious.

U.S. Treasury Secretary Jacob Lew said Tuesday that he has now used all the extraordinary measures to avoid hitting the debt ceiling on Oct. 17.

"If that happens, the U.S. government will not be able to honor its obligations," said White. "We've never been there and this is uncharted territory, so it's hard to know the consequences," added White.

If the U.S. government couldn't pay the obligations or at least not on time, the holders would not be sure if they want to continue to hold U.S. treasury bills, which could be really disruptive, said White.

He added that people will go back to the formal ways if the U.S. government reopens, but things would be different if the government fails to honor its obligations.

However, White thought there will be an agreement on debt ceiling but they may not know it until the very last minute.

Goldstein predicted that the combination of government shutdown and failure to raise the debt ceiling would potentially force the U.S. economy into recession as early as in the first quarter of 2014.

Fitch Ratings Tuesday said the government shutdown was not in itself a downgrade trigger for the sovereign's rating. However, a formal review of the rating with potentially negative implications would be triggered if the U.S. government does not raise the federal debt ceiling in time.

Editor: Hou Qiang
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