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Capital Markets

US debt ceiling: Special focus

The US Treasury released a report on October 3 addressing the debt ceiling and the potential effects of an unprecedented default. The report warns that "credit markets could freeze, the value of the dollar could plummet and US interest rates could skyrocket, potentially resulting in a financial crisis and recession that could echo the events of 2008 or worse”.

Costs resulting from the debt-ceiling debate might already be harming the US economy and affecting the financial markets. We have seen this before: in 2011, the raising of the debt limit was blocked by much debate. This resulted in the first downgrade in the US's credit rating, a substantial stock-market decline and an increase in the costs of borrowing.

 

The 2011 debt-ceiling crisis resulted in the Budget Control Act of 2011 – which created the fiscal cliff – where the US Congress and White House raised the debt limit to $16.7 trillion. This new debt ceiling was already reached in May 2013 but by using "extraordinary measures" the Treasury has been able to continue borrowing while staying below the limit. However, this is expected to be exhausted no later than October 17, according to Treasury secretary Jack Lew


Here's a bit of background on the debt ceiling and commentary on some of the costs already incurred:

 

2013: 

Government bonds: Short-term treasuries hit by shutdown chaos
November 2013

Washington politics puts dollar in peril

October 2013 euromoney.com

Currency investors should avoid complacency over US debt ceiling
September 2013 euromoney.com 

President Obama places his cards on the table
April 2013 euromoney.com

US equities: Timing a turn in cyclicals vs defensives
April 2013 euromoney.com 

Call for dollar bull-run premature

February 2013 euromoney.com 

Against the tide: Climbing the fiscal cliff

Euromoney February 2013

 

Latin America: Concerns about the US hang over fresh DCM

Euromoney February 2013

Currency managers rejoice as foreign exchange correlation hits lowest level since Lehman collapse
January 2013 euromoney.com

Fiscal cliff deal paves way for dollar slide

January 2013 euromoney.com 

US bond bubble: fit to burst?

January 2013 Insight

Will the UK, France and US lose their remaining triple-A ratings in 2013?
January 2013 euromoney.com 

Against the tide: A year of economic porridge

Euromoney December 2012 

USD and the election: It's the fiscal cliff, stupid

November 2012 

Eurozone fears fade as US fiscal cliff takes centre stage

September 2012 euromoney.com

2011:

SEC infighting nobbles money market reform

Euromoney September 2012

Beware the summer lull; no time to be complacent in FX 

August 2012 euromoney.com

IMM: Flight to USD reaches record highs

October 2011

A global sovereign crisis

Euromoney September 2011

Bond Outlook by bridport & cie, August 3 2011 

August 2011 Bridport bond outlook

US debt ceiling: Investors don't believe the hype

Euromoney August 2011 

US debt deal won't save dollar, says JPMorgan 

August 2011

US debt default would have broad, long-term impact

Euromoney August 2011

US dollar losing safe haven status, may spur intervention, says Nomura
July 2011

Aussie hits record high on US dollar recycling  

July 2011

Euro breaks higher as US debt ceiling talks waver

July 2011

EURGBP in limbo; profit with short-volatility trade, says JPMorgan

July 2011

US debt ceiling default threat leaves bond investors unmoved

July 2011 euromoney.com

Foreign investors pull back from US dollar on debt ceiling discord 

July 2011 euromoney.com

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