The Suit Magazine

Financial investors are now facing two possible scenarios involving a federal government shutdown.  The first, less devastating sequence involves the expiration midnight Friday of the current stop-gap spending measure, known as a continuing resolution (CR). The second, more nightmarish possibility involves the federal government failing to raise the debt ceiling, resulting in an unprecedented government debt default.  That decision is still weeks away.
 
The problem is that currently there is no approved fiscal year 2011 federal budget.  If the CR expires on Friday, then the federal government would technically ‘shut down.’  The practical implication of that procedure would be a stoppage in ‘nonessential’ federal government services.  According to a senior U.S. official up to 800,000 workers may be ‘idled’.  The stock market would most probably be adversely affected, depending upon the duration of the stoppage, and market sectors which have been identified as vulnerable include:  energy, because drilling permit procedures could cease, and the healthcare and pharmaceutical sectors, because both drug and medical technology reviews by the federal government could stop.
 
The last federal government shutdown occurred on December 17, 1995.  Goldman Sachs projects that a week-long shutdown could result in an $8 billion per week loss of government spending, creating a drag on an already sluggish economy.
 
The more dreaded scenario, a default, is something which represents an unknown.  The U.S. Federal Government has never been unable to pay its bills.  If that happens, then many economic fundamentals of today’s global economy would be affected, with an uncertain outcome.  Chris Krueger, a policy analyst of the financial group MF Global, said that a default shutdown would result in panic to both the equities and bond markets.
 
 A default would also have a likely impact on the Treasury bond markets.  Treasury bill prices would rise as the federal government might reduce or suspend short-term debt issuance.  According to the Treasury Department, the current debt ceiling of $14.3 trillion will be reached no later than May 16.
 
Currently, Republicans are using the looming crises as leverage to obtain spending cuts which Democrats are seeking to reduce.

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