U.S. political intransigency unsettles financial markets: China warns U.S. against a default

October 7, 2013 – NEW YORK – U.S. stocks dropped on Monday as the partial U.S. government shutdown dragged on with no signs politicians were willing to relax positions over the debt-ceiling limit or budget impasse. Republican House Speaker John Boehner vowed on Sunday not to raise the U.S. debt ceiling without a “serious conversation” about what is driving the debt, while Democrats said it was irresponsible and reckless to raise the possibility of a U.S. default. The United States faces a deadline of Oct. 17 to raise its $16.7 trillion debt limit or risk an unprecedented debt default. The two issues of emergency funding for the government to operate and increase the U.S. borrowing authority started out separately in the House but have been merged by the pressure of time. “Now you’ve got not only the budget but the debt ceiling and time is running out and everybody knows it, including (the politicians),” said Terry Morris, senior vice president and senior equity manager for National Penn Investors Trust Company in Reading, Pennsylvania. “The longer this goes on, the more the uncertainty, the closer the deadline and the more nervous investors are going to be.” The S&P 500 has fallen for two straight weeks and is down nearly 3 percent from its all-time high of 1,725.52 on concerns about the effect of Washington dysfunction on the economy. Each of the 10 major S&P sectors were lower, with financials and energy the worst performers. Exxon Mobil Corp, down 1 percent to $85.42, and Wells Fargo & Co, off 1.5 percent to $49.70 were the biggest drags on the S&P 500 index. The Dow Jones industrial average fell 149.44 points or 0.99 percent, to 14,923.14, the S&P 500 lost 14.4 points or 0.85 percent, to 1,676.1 and the Nasdaq Composite dropped 30.381 points or 0.8 percent, to 3,777.373. –Reuters

Unprecedented economic calamity: Anyone who remembers the collapse of Lehman Brothers Holdings Inc. little more than five years ago knows what a global financial disaster is. A U.S. government default, just weeks away if Congress fails to raise the debt ceiling as it now threatens to do, will be an economic calamity like none the world has ever seen. Failure by the world’s largest borrower to pay its debt — unprecedented in modern history — will devastate stock markets from Brazil to Zurich, halt a $5 trillion lending mechanism for investors who rely on Treasuries, blow up borrowing costs for billions of people and companies, ravage the dollar and throw the U.S. and world economies into a recession that probably would become a depression. Among the dozens of money managers, economists, bankers, traders and former government officials interviewed for this story, few view a U.S. default as anything but a financial apocalypse. The $12 trillion of outstanding government debt is 23 times the $517 billion Lehman owed when it filed for bankruptcy on Sept. 15, 2008. As politicians butt heads over raising the debt ceiling, executives from Berkshire Hathaway Inc.’s Warren Buffett to Goldman Sachs Group Inc.’s Lloyd C. Blankfein have warned that going over the edge would be catastrophic. “If it were to occur — and it’s a big if — one would expect a series of legal triggers, potentially transmitting the default to many other markets,” said Mohamed El-Erian, chief executive officer of Pacific Investment Management Co., the world’s largest fixed-income manager. “All this would add to the headwinds facing economic growth. It would also undermine the role of the U.S. in the world economy.” –Yahoo Finance

China warns U.S. against a default: A senior Chinese official has warned that the “clock is ticking” to avoid a U.S. default that could hurt China’s interests and the global economy. China, the US’s largest creditor, is “naturally concerned about developments in the U.S. fiscal cliff,” vice finance minister Zhu Guangyao said. China holds about $1.3 trillion dollars in U.S. Treasuries. Washington must agree a deal to raise its borrowing limit by 17 October, or risk not being able to pay its bills. He asked that “the U.S. earnestly take steps to resolve” the issue. U.S. Treasury Secretary Jacob Lew has said that unless Congress agrees an increase in the debt ceiling by 17 October, Washington will be left with about $30bn in cash to meet its obligations – about half the $60bn-a-day needed. For many governments and investors the approaching deadlock over the debt ceiling is far more critical than the current impasse over the federal shutdown caused by Congress’s failure to agree a new budget. On Sunday Republican House Speaker John Boehner reiterated that Republican lawmakers would not agree to raising the debt ceiling unless it included measures to rein in public spending. Mr. Zhu said that China and the U.S. are “inseparable.” Beijing is a huge investor in U.S. Treasury bonds. “The executive branch of the U.S. government has to take decisive and credible steps to avoid a default on its Treasury bonds,” he said. “It is important for the U.S. economy as well as the global economy.” –BBC

Playing with Fire: U.S. budgetary uncertainty is breeding a cloud of fear over global financial markets, and whether both sides harbor intensions of parlaying the dare to the precipice of the eleventh hour to get their way or not; the damage of increased risk to markets may have already been sown. In such a climate of uncertainty, the psychological maelstrom of fear can have incalculable effects on the human psyche. The slightest miscalculation could lead to disaster, as the margin for error is gravely minimalized. The wrong button hit by a trader, or a large investor moving money out of the market due to safety concerns could be enough to trigger an avalanche of sell-offs that could send markets crashing from Singapore to Dubai. –TEP