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Millennium Post

Theatrics of a shutdown

For the world’s finance ministers gathered in Washington to tone up the global economy’s recovery, it was a bizarre spectacle of the Federal Government in shut-down for two weeks with a more alarming threat of a potential default of US debt that a sharply divided Congress posed. The Obama Administration had sought raising by October 17 the debt ceiling earlier set at 16.7 trillion dollars.

The lingering fiscal standoff in the world’s largest economy ‘transformed’ the annual meetings of IMF and the World Bank (11-12 October) where Finance Ministers had to shift their focus to the looming threat of a debt default which, unresolved, could cause a ‘massive disruption the world over’, according to IMF Chief Christine Lagarde. Financial markets and governments and central banks were putting themselves on alert to the dangers of a default which would instantly hit the dollar with its principal reserve asset status, destabilse the largest economy of USA, the world’s safest anchor, and spread disorder across the globe.

Republicans controlling the House of Representatives, who triggered the shutdown by not passing an interim funding measure for the new fiscal year from 1 October, failed to agree to President Obama’s suggestion to reopen government and lift the debt default threat unconditionally.

The President made it clear he would not accept any ‘ransom’ for law-makers doing their duty but once they responded as suggested, he would hold wider talks with Congress leaders on budget, tax and other issues.

In the face of stubborn resistance of House Republicans and taking note of grave concerns from world leaders in US capital, the Senate Democrat majority leader and the Republican minority leader held talks and had nearly reached a deal by the night of October 14. This brought a glimmer of hope though doubts remained whether it would go through the Republican-controlled House, with hardly a day or two left for 17 October.

On that date, according to the US Treasury, it would become short of funds to meet regular payments of billions of dollars in social security and other entitlements or to honour obligations to investors/foreign creditors on interest and principal repayments.

The Senate deal reportedly proposed financing of government till 15 January  and raising of debt ceiling till 7 February with formal discussions on long-term tax and spending plans to be concluded by 13 December.

Reflecting the concerns of emerging nations, the Fund communique said the ‘eventual transition toward the normalisation of (US) monetary policy, in the context of strengthened and sustained growth, should be well timed, carefully calibrated, and clearly communicated’. It also spells out what emerging and other developing countries have to be doing to safeguard against vulnerabilities.
 
It is likely that Governments and Central Banks might well use the time before tapering begins on fiscal balancing and other measures to reduce dependence on financing from abroad. From the beginning, the Republicans were bent on effecting major changes to the Affordable Healthcare Act of President Obama and wanted to defund the programme in the budget. The Senate Democrats in majority rejected every House bill tinged with such conditions, and insisted on a clean short-term funding. But the Republicans, egged on by the extremist ‘Tea Party’ adherents, were out to play a political game.

As the shutdown dragged into the second week, it had become even more urgent for raising the debt ceiling with barely a day left before 17 October, the deadline repeatedly notified to the Congress by the Treasury. Republicans first indicated they would accept a short extension but subsequently made it conditional on budget negotiation.  They have remained unconcerned about the global implications of a default – a fringe of the party even favoured it as of no consequence.
Meanwhile, the Shutdown, which furloughed hundreds of thousands of workers, closed down national parks and brought scores of federal facilities to a standstill across the nation, entered the third week on 14 October.

 The President warned the nation in his weekly address that damage to America’s sterling credit rating would ‘not just cause global markets to go haywire, it would become more expensive for everyone in America to borrow money’. The government is closed for the first time in 17 years and a political party is risking default for the first time since the 1700s, he noted.

According to noted Harvard economist, Kenneth Rogoff, the current battle over debt ceiling reflects ‘a deeper constitutional power struggle between the president and Congress’. If left unresolved, it could profoundly weaken the government’s ability to make significant economic decisions in the future, he said.
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