Let the Debt Ceiling Negotiations Begin!

After more than a week’s worth of arguments, Republicans and Democrats finally seemed to make a bit of progress with the debt ceiling negotiations.

As I mentioned in one of my Piponomics articles last week, the center of their debate is the Affordable Care Act a.k.a. Obamacare. Basically, House Republicans wanted to delay these healthcare benefits while Senate Democrats kept rejecting the proposals being made. The lack of an agreement eventually led to a U.S. government shutdown.

However, the problem is that the shutdown makes it more complicated for lawmakers to come up with a solid battle plan for the looming debt ceiling. Remember that, if they run out of money by October 17, the U.S. would end up defaulting on its debt for the first time in history.

Yesterday, Republicans were invited by President Obama for some chit-chat in the White House. Led by Speaker John Boehner, these lawmakers were able to jumpstart the fine-tuning process for their proposal to increase the Treasury’s authority to borrow money needed to pay debt obligations until November 22.

In exchange, Republicans wanted Obama to commit to a deal for a long-term deficit reduction plan, which includes a tax revamp. For now though, Obama hasn’t said yes or said no to the proposal. Despite the lack of an actual plan of action, signs that Democrats and Republicans are working on negotiations allowed the markets to breathe a sigh of relief.

Despite the lack of a specific resolution, stock markets around the world took the news positively. Nikkei went up by 1.12%; FTSE 100 ended the day with a 1.46% uptick, and S&P 500 closed with a 2.18% gain.

The major currencies also reflected the overall improvement in risk appetite. For one thing, USD/JPY ended the day firmly above the 98.00 handle. Other yen crosses like EUR/JPY, AUD/JPY, and GBP/JPY also closed with significant gains. The yen wasn’t the only loser though, as the low-yielding Greenback also lost against its major counterparts with EUR/USD and GPB/USD closed in the green.

USDJPY1

Although no concrete deal has been reached yet, we now know that any development on the debt ceiling issue is taken positively across the board. After seeing restrained price action over the past couple of weeks, expect to see more significant price reaction to any news that might hint at improvements or breakdowns in the lawmakers’ negotiations.


Do you expect more concessions from Republican leaders before they raise the debt ceiling?

  • Stevecsd

    It is not necessarily true that if there is no deal on increasing the debt limit that the U.S. federal government will be in default. The Federal government collects roughly $250 billion per month in tax revenues. The interest on the federal debt, which is what would be in default, is $35 billion. So there is plenty of cash to pay their interest payments and NOT go into default. The big spenders want everyone to think that if there is no increase in the debt limit we would automatically be in default, which is clearly not true.

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