Talk of US Debt Default Unsettles Markets

Global markets continue to be affected by the grim possibility that the US government’s partial shutdown could result in the world’s largest economy defaulting on its debt. Japan’s Nikkei index dropped by more than 1 percent to 13,853.32 on Monday, with the Hang Seng index of Hong Kong falling 0.7 percent to 22,973.95 and India’s BSE 30 losing 0.5 percent to close at 19,808.71. Markets were closed for a public holiday on mainland China. Following Friday’s modest gains, markets slumped ahead of the opening bell on Wall Street on Monday. The Dow Jones industrial average index futures dropped 0.8 percent, with the Nasdaq index futures falling 0.9 percent and Standard & Poor’s 500 index futures slumping 1 percent. As the impasse between Republicans and the White House continues, investor anxiety has risen. The news that there would not be a vote on a straightforward bill to grant the government borrowing authority before the October 17 deadline has shaken markets as is evident in major indexes.

Analysts warn that a debt default would be disastrous as it would harm the credit rating of the United States. It may also result in an increase in interest rates and have a negative impact on stock and bond prices, as well as damaging the value of the US dollar on international currency markets. Moreover, the damage to consumer confidence may have a negative impact on the economy. In a letter to Congress in September, current Treasury secretary Jacob Lew reportedly pointed out that the debt limit impasse that took place in 2011 “caused significant harm to the economy and an unheard of downgrade to the credit rating of the US.” Former treasury secretary Henry Paulson reportedly stated that in his view it would be “unthinkable that Congress wouldn’t live up to (its) commitment to make good on past spending commitments and obligations”.

Analysts note that investors who have confidence that Congress will find a last minute resolution are likely to see stocks, bonds and the US dollar rise in value, while those who anticipate a default may choose to shift money from stocks into bank deposits, or invest in funds such as the RYURX – Rydex Inverse S&P 500 Strategy fund – which rise when stocks fall.