The Markets


October’s dose of dysfunctional US Government may not be the last.

The time was that the global prize for crisis deferral – as opposed to resolution – belonged to the EU.

Think back beyond the last 12 months and there was a succession of euro crises and on each occasion, the European Central Bank and/or the European Commission kicked the can down the road. In some respects the euro can is still being kicked – another bailout for Greece remains a distinct possibility and many decisions are waiting for the new German government to arrive. That said, the US government has outperformed the EU with its latest bickering over the Federal budget and the loan ceiling.

The USA began its new financial year in October with no approved budget – hence the shutdown of large slices of its bureaucracy. The country was due to reach its borrowing limit ($16.7trn) on October 17, at which point the fear was Uncle Sam would start defaulting on loan repayments. That never happened, thanks to the seemingly inevitable last minute agreement, but the fudge reached between Congress and the President is can-kicking on a USA scale. In theory the timeline is now:

December 13  The  Senate and the House of Representatives is due to reach an agreement to reduce the Budget deficit.

January 1  If there is no agreement in Congress, then the second round of automatic spending reductions – aka Sequestration – will start. These are across-the-board default cuts which were designed (unsuccessfully) to encourage an agreement to an earlier budget dispute.

January 15   The temporary October budget fix expires and another government shutdown will begin if there is nothing in its place.

February 7  The October borrowing fix reaches the end of the line, meaning default worries will re-emerge if there has been no earlier agreement.

One curious consequence of these self-inflicted wounds is that the investors have become less worried that the Federal Reserve will start tapering its $85bn a month quantitative easing programme. This had been expected to begin in October, but never arrived. It may not now get underway until March, given those looming winter deadlines and the arrival of a new Fed chair (Janet Yellen) to replace Ben Bernanke in January.

The next few months promise to be an interesting and potentially volatile time…