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The crisis in the USA: off to the winds
Material posted: Publication date: 15-10-2013

The U.S. government closed the second week in a row: Congress and President Obama were unable to agree on the budget for 2014. Expires and the deadline for raising the debt ceiling of the country - after October 17, the US may not be able to service their bonds.

Economists and analysts are wondering how this will end. The lumen is not visible - negotiations between the Democrats and Republicans went all weekend, but by Sunday evening it became clear that the parties are not yet ready to deal neither on budget nor on government debt.

Democrats believe that the budget cutting has to be stopped in mid-November, the Republicans want the mode of sequestration and continued in 2014. The demands of the Democrats become more stringent. A few days ago they demanded from the Republicans to open the government and raise the debt ceiling. Republicans in response have put forward their conditions. Now the Democrats are not going to discuss the opening of the government and the national debt in isolation from the problems of sequestration.

On Sunday, Senator Harry Reid, who heads the democratic majority in the Senate, and the Republican leader in the Senate Mitch McConnell tried to find a way out of the budget of the clinch. The attempt failed, but perhaps a solution would be found Wednesday.

Nomura: American politicians have plunged the world into crisis

Japanese Bank Nomura still remains optimistic. The Bank's economists believe that the Americans are not plunged the world economy into a new recession. The report of the Bank quote the blog FT Alphaville.

Baseline scenario: us policies agree to 17 October

  • With 70% probability the Republicans and Democrats can agree on increasing the debt ceiling before October 17. The same thing happened in 2011.
  • Perhaps both sides negotiate a temporary extension of rights of the U.S. government to take - the Republicans have already proposed to President Obama to stave off default for six weeks, giving the Treasury the green light to issue new bonds. However, Obama has refused.
  • It's better than the default. But fundamentally these six weeks will not change anything. The tension in the financial markets will rise: investors will realize what papers will be defaulted, and begin to get rid of them.

Second scenario: pending decision

  • October 17 will come, but the solution will not be found because of procedural delays. Congress may not be able to approve it and the President to sign.
  • Thus, formally the crisis is over, but it will become clear that the politicians were able to agree and the basis for the decision is already there. The decision will be formally adopted on October 18-20.
  • The probability of "no-Yes" - only 20%. If this scenario is implemented, a disaster it will not.

Threat scenario: the Treasury cheated and he has the money

  • By 17 October the decision and will not be. The probability of such a development is 10%.
  • In this case it is important to understand when, actually, the Treasury will run out of money in the account.
  • According to some estimates, the Treasury enough money to avoid default until the end of October. If so, then the United States will meet its obligations. It's not the most pleasant scenario.

Worst case scenario: the US remains without money

  • The worst scenario: the Treasury is without resources and unable to fulfil their obligations. This probability to 2%. This scenario "no-no".
  • But here again, the Treasury can avoid default on the national debt, for example, if you refuse to pay the bills of the government and will send all remaining money to debt servicing.

The key date remains November 1. It then becomes clear the consequences of a technical default. If the most disastrous scenario is implemented, the markets will panic. In such a situation, the markets will have to support the IMF. Maybe the fed will buy bonds, which will be defaulted.


CitiGroup: debating American politicians hurt the economy

Baseline scenario: a temporary compromise

  • The U.S. government will be closed a month or even longer.
  • From 16 to 30 October, the government will find a way to solve the problem of the debt ceiling, perhaps the right to lend temporarily prolong or freeze the attack limit.
  • However, the experience of 2011 suggests that the business activity may not be affected, if, immediately after the dispute resolution will restore confidence in the economy.

A technical default

  • The Treasury running out of cash and take it – no power to it.
  • The agreement on the complete restoration of the functions of the government and raise the debt ceiling would be reached by December.
  • In this case, in the fourth quarter GDP will decline by 4.1% and the unemployment rate will rise to 7.7%. Then the growth rate will recover to 3.2% in the first quarter of 2014, and unemployment will decline slowly.

The long-running conflict

  • The debt ceiling cannot be raise for a long time. In reality this scenario is unlikely.
  • It destroys the U.S. economy and financial markets are not able to win back its losses.
  • The recession will last four consecutive quarters, the unemployment rate will rise to 9.8%. In the next year and a half, she will not be cut, despite a slight recovery in the fourth quarter of 2014.

Politicians have not agreed how to resolve the problem of the national debt

  • The budget crisis is resolved, the budget cuts no longer slows down the economy.
  • But financial markets remember the damage that they suffered. A budget crisis in the US affect conditions in the financial markets.
  • Investors and the public are concerned about the debt, but the government is unable or unwilling to carry out reforms.
  • In this scenario, the U.S. economy provided inconsistent growth. Unemployment in this case, by the middle of 2014 will reach 8% and will not decline.


Morgan Stanley: we'll have to violate fundamental laws

The current crisis in the USA has led the three laws.

1. The limit on the national debt was set by the Second law on bonds (Second Liberty Bond Act), adopted in 1917.

2. The law on Federal reserve system prohibits the Central Bank to give in debt to the Treasury directly.

3. The fourth section of the 14th amendment of the U.S. Constitution provides that "the validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and awards for service at suppression of mutiny or revolt, is not questioned".

In an extreme case, American politicians will have to break one of three laws. This will immediately resolve the crisis.

  • If the head of Treasury will decide to violate the first law, then the Treasury can just increase the national debt and voluntary decision. In this case, the debt will not be protected 14th amendment, as it will be released in violation of law and without the approval of Congress. Default on such debt could have serious consequences, it is more risky paper. In fact, the Treasury will issue "red" bonds, to repay and to pay interest on "blue" bonds. Once the debt ceiling is officially raised, "red" bond will be "blue".
  • If the fed dares to violate the second law, the Treasury account at the Central Bank exceeds the credit limit and all Treasury operations continue.
  • If the head of the Treasury or the fed Chairman will go on breaking the law, they face suspension or dismissal. In exchange, they will preserve the stability of the global financial system. Seems like a reasonable deal. In this situation, the U.S. government will not declare a default.


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