RBI needs $50-100 bn for bullet-proof balance sheet: BofA-ML
Forget US, If GoI shuts down, India will prosper once again

Economy Oct 2, 2013

US shutdown weakened dollar, but Wall Street didn’t implode

By Uttara Choudhury

New York: Well, the partial shutdown of the US government happened on Tuesday and Wall Street didn't implode. That's because US stocks have been selling off on shutdown fears most of last week - the event was already priced in. And, investors were prepared for the extreme political dysfunction shown by the US Congress.

It seems that the fallout from Washington's impasse has been felt stronger oversees in emerging markets than here in America. On the first day of the partial shutdown on Tuesday US investors stayed calm and sent the stock market modestly higher. The Dow Jones industrial average rose 62.03 points, or 0.4 percent, to 15,191.70.

Reuters

Reuters

"The relative reactions of markets speak to asymmetry: Investors simply treat the West differently from the rest," noted The Wall Street Journal.

"Even when the US displays extreme political dysfunction, investors still treat it as a haven," added the Journal.

However, the US dollar is proving an early victim of the government shutdown. Expectations that the first US government shutdown in 17 years could be prolonged sent the dollar to its lowest level against a basket of major currencies in nearly eight months. The dollar index, which tracks the greenback against a basket of six major currencies, fell as low as 79.864 DXY, its lowest since February 13.

A long-running dispute on Capitol Hill over President Barack Obama's health care law caused a partisan deadlock over the US budget, forcing about 800,000 federal workers off the job, closing museums and national parks and suspending all but essential services.

With the Republican-controlled House of Representatives and Democrat-controlled Senate locked in a stalemate, it was unclear how long a temporary bill needed to finance government activities would be stalled.

A temporary government shutdown of one or two weeks would be negative for the US economy but not an immediate disaster. Tellingly, gold has not rallied; investors are betting that the US government closure will be short-lived, damping demand for gold as a haven.

Extreme political dysfunction

You might think the Indian government takes the cake when it comes to policy paralysis, but the US Congress also has a penchant for getting stuck in astounding policy gridlock.

Funding to keep the federal government running expired on Monday midnight as the two parties and the White House were adamant about their positions. Republican leaders refused to fund the government unless funding
for Obamacare was yanked at the same time. And that's a nonstarter for Obama and Democrats, who see health-care reform as settled law, ratified by the Supreme Court and a presidential election, that the public may not love but has little desire to re-litigate.

President Obama slammed House Republicans on Tuesday for their efforts to scale back or dismantle the 2010 health law, the Affordable Care Act.

"They've shut down the government over an ideological crusade to deny affordable health insurance to millions of Americans," Obama said from the White House Rose Garden.

Polls consistently show that Americans aren't happy with Obamacare.

They think the law will make health care more expensive, and decrease its "Senate Democrats today slammed the door on reopening the federal government by refusing to talk," Republican House Speaker John Boehner complained to the US public on Tuesday.

More problems down the road

The lack of negotiations between the two parties and the White House raises the possibility that the partisan divisions that have brought the US government to a standstill could impede the ability of the Treasury to pay the government's bills beyond mid-October.

Congress has to approve an increase in the federal debt ceiling by then, and failure to do so could bring more troublesome consequences for the US and global economies than the partial US government shutdown. Ultimately, a prolonged shutdown will weaken the US economy and this would impact Indian exporters - from farmers to factory owners - who are hoping to reap the benefits of a weak rupee.

The US Congress failed to come to a bipartisan agreement on raising the debt limit in August 2011 endangering America's credit rating. After the bitter fight in Congress over raising the debt limit in the summer of 2011, Standard & Poor's downgraded the US government's credit rating to AA+ Obama has said from the beginning that he won't negotiate over the debt ceiling, which is set to be hit in a couple of weeks.

by Uttara Choudhury

Related Stories.