Last week, financial markets were firmly focused on the partial closure of US government services for the first time in 17 years. The shutdown will directly impact US economic activity, with estimates of a cost to the economy of around USD300m a day in lost output.
President Obama continued to urge House Republicans to move legislation to reopen the entire government citing that "an economic shutdown that results from default would be dramatically worse." The US Department of Treasury published a report warning of the potential damage to the US economy if the Government were to default on its debt payments, claiming a default would be unprecedented and have the potential to be catastrophic: “credit markets could freeze, the value of the dollar could plummet, and US interest rates could sky-rocket, potentially resulting in a financial crisis and recession that could echo the events of 2008 or worse”.
Everyone expects a response; the fact that it is a political response rather than via financial markets is what makes it hard. It seems to me that a successful resolution of the issues requires considerable pressure to be brought to bear from either the polls or markets. With the markets not really delivering that pressure so far, I think there is considerable risk that this government shutdown will drag on.
More important for financial markets than the shutdown itself is the possibility that the political stalemate will extend to the imminent need for the US debt ceiling to be raised, which is due on 17 October 2013.