Debt-Ceiling and the US Government Shutdown in 3 minutes
Shutdown? What does that even mean?
The US Fiscal Year begins on October to September. This means that like all economies, the US government is supposed to pass a budget before the fiscal year begins.
This time around, Trump is asking the Republicans to add the spending on the wall ($1.6 billion) to the proposed budget. Now getting that through the senate would be difficult because spending bills generally require 60 votes and there are only 52 republicans (all of whom also might not support Trump).
If the spending bill doesn’t pass, the government can pass at least a continuing resolution, which means the provisions of the budget made last year would prevail this year as well, until new provisions are debated upon and passed.
If that also fails to happen, then the GOVERNMENT SHUTS DOWN. Deadline is September 29.
Can Trump afford this? Yes – he will blame it squarely on the GOP, which will work fantastically with his base. So a shutdown is a real possibility.
What in God’s name is the Debt-Ceiling?
That’s an entirely different issue, although the timing can make it a little confusing. The Treasury needs to borrow more money and it can’t do so unless it’s politically decided. However, this should be relatively easier to pass, since the increment in the debt-ceiling itself doesn’t decide where this new money will be spent. It merely allows the Treasury to borrow money to pay existing bills for spending that Congress has already approved.
The issue had surfaced in March this year, with Treasury’s ability to borrow set to expire on the 16th of March 2017. Since then, the buck has been passed with the Treasury employing ‘extraordinary measures’ to continue with the necessary activities. However, the cash is going to get over in October.
Which one will have a bigger impact on markets?
Debt-Ceiling is directly related with making good on borrowed money, so it’s obviously very crucial. “A government shutdown would not have a direct impact on the US's 'AAA' rating, but it would highlight how political divisions pose challenges to the budgetary process.” (Fitch)
Political uncertainty is bad for credit ratings – they like the predictability of the arms-length processes in the developed markets. So in that sense shutdowns are bad. But Debt Ceiling is certainly more important, at least as far as fixed income markets are concerned.
Will there be a downgrade? Again?
The possibility of a downgrade should be slimmer this time, because although the US’s Debt-to-GDP ratio is close to 100%, the budget balance has improved remarkably to nearly -3.5% of GDP. The only thing that might have deteriorated is political uncertainty.
What happened last time after a downgrade?
Last time when there was a delay in raising the debt-ceiling, there was a risk-off move in the market. Very short term rates sold off in the US, while longer term bonds rallied (both German and US) indicating safe haven flows.
However, when the S&P downgraded the US, Fitch and Moody’s came out saying that the US remains solid. Now if another one of them leaves, markets might start questioning the credibility of the “full faith and credit of the US Treasury”.
Moreover, 2017 is no 2011. Japan and the Euro area are doing much better this year than they were doing then.
Also note that the impact on short term bills will be much higher this time, partly because of the money market reforms of last year, which have caused a bunch of funds to shift to holding government paper.
Yeah yeah… Ain’t nobody breaking a sweat over this! We got bigger problems!
You talking about Trump? Anyway, some investors have taken note. Look at the spread between the Treasuries maturing on the 28th of September and the 12th of October. That’s nothing but the risk of a delay in payment being priced there!

With only 12 sessions left between now and October, will we see another episode of ‘Breaking the Buck’? Will there be another Repo market crisis? Only time can tell!
