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US government plays chicken with budget again

Markets are in turmoil and oil prices are dropping because the US government can't agree on healthcare. Oh, and Italy's government is also having a spat.

by Emma Haslett
Last Updated: 01 Oct 2013
Investor confidence – that blossoming, fragile thing – has taken a beating this morning, with uncertainty in the US, Italy and China conspiring to cause markets across Asia and Europe to drop.

Overnight, Japan’s Nikkei fell 2%, Hong Kong’s Hang Sen fell 1.5% and Australia’s ASX dropped 1.7%, while the FTSE 100 fell 0.83% this morning. Brent crude has dropped by 89 cents to $107.74 a barrel.

That investors aren’t even more skittish is a relief: after all, the US government, ie the people in charge of the free world, is hours from grinding to a halt.

Unless Republicans and Democrats can agree on a national budget by the end of the financial year at midnight tonight, 800,000 workers at ‘non-essential’ federal operations – parks, museums, passport and visa applications systems and civilian army operations – will be put on unpaid leave, with no guarantee they’ll get backpay once things are up and running again.

The probability is that after a few hours of playing chicken with one another, the two sides will reach a deal before the deadline (the disagreement hinges on a clause that provides free healthcare to certain sections of the population, to which Republicans are opposed).

Ditto on its $16.7tn borrowing limit: Treasury secretary Jack Lew has warned that the US will hit its debt ceiling by mid-October, leaving it with half the amount it needs to pay its bills.

The debt ceiling has been the subject of inter-party battles before: back in 2011, the two sides agreed a deal minutes before the deadline. The Republicans are fiercely against raising the debt ceiling, but there isn’t really another option: because the yield on US Treasury Bonds is the benchmark for almost all interest rates, it would affect borrowing costs and interest rates all over the world. Which means the outcome of a testosterone-fuelled power-play between a few blokes in Washington will have an impact on almost everyone. Scary.

Testosterone is an ever-present factor in the Italian government, too: the country’s coalition (at five months old, also fragile) is about to collapse, after Silvio Berlusconi’s centre-right party asked its ministers to resign. That could mean another election in November, which risks derailing approval for the country’s 2014 budget, due to be presented to the European Commission in mid-October.

Even without political infighting, the country is hardly in a comfortable state: it’s at risk of failing to meet its 3% budget deficit target this year. That’s likely to push up the yield gap between Italian and German debt (the benchmark by which others are judged), which will probably cause ratings agencies to downgrade it.

So that puts a swift end to all those positive ‘recovery’ headlines we’ve seen lately. What’s interesting is that because it’s been looking like the US is well on its way to recovery, investors have been taking cash out of Asia and ploughing it into the US.

The result is that things aren’t looking great in China, either: although HSBC’s manufacturing index expanded to 50.2 points in September from August’s 50.1 (anything above 50 denotes growth), that figure is way lower than the 51.2 originally published in a preliminary version of the index earlier this month.

When a butterfly flaps its wings in the US, there are hurricanes in the rest of the world. With recovery this fragile, this isn’t the time for its government to play fast and loose with the global economy.

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