Towards financial Armageddon?

Yesterday there was “optimism”; today there is still no agreement. My bet is on a last minute agreement to “kick the can down the road”

Fitch puts US credit rating under review for downgrade

Global credit rating agency Fitch has put the United States’ ‘AAA’ credit rating on “rating watch negative” based on stalled debt ceiling negotiations.

RT,

15 October, 2013

"Although Fitch continues to believe that the debt ceiling will be raised soon, the political brinkmanship and reduced financing flexibility could increase the risk of a US default," Fitch wrote in a release Tuesday afternoon. 

The agency said the US Treasury, though it could still make some obliged payments after October 17, may be exposed to “volatile revenue and expenditure flows” based on the impasse in Washington.

“The US risks being forced to incur widespread delays of payments to suppliers and employees, as well as social security payments to citizens - all of which would damage the perception of US sovereign creditworthiness and the economy,” Fitch wrote.

Halted talks on raising the debt ceiling risk "undermining confidence in the role of the US dollar as the preeminent global reserve currency, by casting doubt over the full faith and credit of the US,” Fitch went on. “This ‘faith’ is a key reason why the US 'AAA' rating can tolerate a substantially higher level of public debt than other 'AAA' sovereigns.” 

"The announcement reflects the urgency with which Congress should act to remove the threat of default hanging over the economy," a US Treasury spokesperson said. 

In August 2011, credit rating agency Standard & Poor’s downgraded the US credit rating from ‘AAA’(outstanding) to ‘AA+’ (excellent) amid a similar stalemate in Washington on raising the debt ceiling. 

Fitch added that the regularity of the US debt-ceiling fights contributes to Tuesday’s move.

“The repeated brinkmanship over raising the debt ceiling also dents confidence in the effectiveness of the US government and political institutions, and in the coherence and credibility of economic policy. It will also have some detrimental effect on the US economy,” Fitch wrote. 

House Republicans nixed a vote scheduled for Tuesday evening on a plan that would have sought to reopen government agencies and raise the debt ceiling before the US defaults on October 17. 

Sources told Politico the GOP did not have a sufficient number of votes to pass the legislation. 

The cancelled vote follows an earlier House GOP proposal Tuesday that was rejected by the White House. 

President Barack Obama said in a Tuesday interview that he expects a deal on the debt to happen, despite the tight deadline.

"Let's not do a lot of posturing, let's not try to save face, let's not worry about politics,” he told WABC in a note to fellow lawmakers. 

Plan B: Central banks getting ready for financial Armageddon

If the US debt-ceiling debate goes past the eleventh hour, and the default of the world’s largest economy becomes a reality, leading central banks around the world are gearing up to minimize losses and keep the world economy functioning.

 

RT,

15 October, 2013

If US lawmakers don’t reach a budget consensus and raise the debt ceiling by Thursday October 17, the US will become the first Western power to default since Nazi Germany in 1933, and will send markets into uncharted territory.

The rest of the world is bracing itself for what would happen if the bill is rejected, and the US inches closer to defaulting on its debts, which are largely foreign- held in the form of US Treasury Bonds.

Central banks have begun preparing for the worst-case scenario if US does fault, which would result in a serious devaluation of Treasury bonds, delayed payments, and a more large-scale version of the current government shutdown.

“Because in the past it’s always been sorted out is absolutely not a reason to fail to do the contingency planning,” Jon Cunliffe, who will become the Bank of England’s deputy governor for financial stability in November, told UK lawmakers.

“I would expect the Bank of England to be planning for it [US default]. I’d expect private-sector actors to be doing that, and in other countries as well,” said Cunliffe, who acknowledged a default as “the main risk to the [global] financial system”.

The European Central Bank and the People’s Bank of China (PBC) have struck a deal that moves both banks farther from the dollar orbit. The two banks agreed to ‘swap’ $56 billion worth of yuan for $60.8 billion worth of euros.

Many central banks have reserves in the form of Sovereign Wealth Funds, which are also at risk if the US defaults, as many of the assets are held in dollars. These investment vehicles could be crippled by a default. China’s is estimated at more than $1.3 trillion - the world’s largest.

A historic shift

Neil Mackinnon, a former UK Treasury official, told RT the US default tango marks a shift in the global economic paradigm, from West to East.

If the US doesn’t act soon, “the dollar will decline and its importance will move to a multi-polar currency system and other currencies will take on board more importance,” said Mackinnon.

Over the weekend, economic leaders from around the world met in Washington DC at the International Monetary Fund’s annual meeting. The fund’s managing director, Christine LaGarde, issued a harsh warning the global financial system could enter a recession if the US misses its debt deadline.

The US Senate said they will announce a deal to end the shutdown and extend the debt ceiling on Tuesday, which will pass through to the House, where it will face Obama’s hard-nosed Republican opponents who want to cut funding of the Affordable Care Act.

Senate Majority Leader Harry Reid, a Democrat, said Tuesday has the potential to be a “bright day” and bring calm back to the global markets. 

Jim Rogers: US is exceptional...it's largest debt nation in the world!

There may be progress in US over the government shutdown and debt ceiling, but it's not all good. The deal being talked about now wouldn't resolve the crisis - but rather kick the can down the road setting the scene for another budget showdown early next year. For more on this RT talks to investor Jim Rogers, author of 'Street Smarts - Adventures on the Road and in the Markets'.