It appears the government shutdown will not be resolved quickly; brinksmanship likely will continue, with the focus shifted to the debt ceiling increase, whose deadline has been targeted as October 17.
This week we focus on why markets have reacted mildly to this point. Next, we address the possibility that—even if Congress fails to act—the US has options for avoiding default. Finally, we address the 14th Amendment to the Constitution that potentially provides a way out should Congress fail to act.
Why markets ignored Washington risk. “No-one believes that a temporary shut-down in some government activities is critical, but the debt ceiling is a different matter entirely. A default by the US government on its debt payments could be disruptive and set in train a series of events which would be hard for the authorities subsequently to control … he US political process has it within its power to end the uncertainty at very short notice when political calculations change. This is not a case of ‘can’t pay’, it is a case of ‘won’t pay’ … to a sensible outside observer, it seems improbable that enough members of Congress would act against the interests of the US to trigger a ‘won’t pay’ catastrophe. Investors have recent experience of very similar disputes in Washington … market disruption in earlier episodes turned out to be relatively minor and short-lived … markets remain eerily calm amidst the heat of the political battle.” Financial Times (tiered subscription model)
It is unlikely the US would choose to default on its sovereign debt. “Most observers, including the major investment banks, think it is very unlikely that the US would ever choose to default on any payments due on its sovereign debt, even if the debt ceiling is left permanently unchanged after 17 October