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Debt ceiling: Potential chaos makes Wall Street nervous



But what really makes investors worried? Fundamental economic indicators such as unemployment and consumer spending are still very strong.

At least part of the answer lies in two words: Debt ceiling. The impasse over the border wall which caused the closure of some governments, which had no visible end, was a bad sign for the ability of lawmakers to reach agreement on extending government loans, financial problems that have a far reaching effect.

Sometime in the second half of 2019, the Ministry of Finance will lose the ability to borrow if Congress and President Donald Trump cannot agree on how to overcome these restrictions.

The suspension of the current debt ceiling, which was quietly agreed to last year, will end on March 1. But the Treasury will be able to cover its bills at least until mid-summer by moving money around – a series of maneuvers officially designated "extraordinary actions."

Federal loans are not a small problem, especially because the federal government is expected to spend around $ 1 trillion more this year than will be brought. It must borrow to make a difference and make good on all its obligations to federal contractors, American workers, investors, other countries and countless other creditors.

The debt of the US government is considered the safest in the world, because the United States has never denied its debt. Defaults can have devastating consequences, from pushing loan costs soaring to jeopardizing the status of the dollar as the world's reserve currency. The mere risk of a debt ceiling crisis can disrupt the market. The only way out is for Congress to reach an agreement with Trump, when both parties don't seem to be interested in compromise.

"The closure of the government itself does not have a big economic impact," said David Lafferty, chief market strategist at Natixis Investment Managers. "But I think it's a symbol of the relationship the president will have with Congress. And most people believe that the closure of government is an obstacle that is easier to pass than the debt ceiling."

The market is very concerned about the debt ceiling. In 2011, protracted negotiations around the debt ceiling caused rating agencies to lower US credit ratings, making the market free fall. The S & P 500 fell around 17% from the end of July to the beginning of August that year, and did not regain its footing until entering 2012.

A brief report from the Ministry of Finance in 2013 blamed brinksmanship for placing a dent in America's fragile recovery from the Great Recession.

Even though most Americans do not own shares, a decline in equity prices can hamper investment and create negative feedback with consumer sentiment that suppresses spending. An unpleasant sign of the downward spiral arrived last week, when the Conference Board's consumer confidence index posted its biggest decline since July 2015.

Some observers think the US government will really go to start repaying lost debts. In a note published earlier this month, Moody's Investor Service characterized the prospect of the actual default as "very unlikely." The agency has only measured US institutional strength only a little because of "the tendency for debt limit debate to add to political disputes and weaken the budgeting process."

But history has not been a guide in the Trump era, as described by the ongoing closure.

"You get closure with no one negotiating with each other, and no real end is seen," said Christopher Smart, head of macroeconomic and geopolitical research at Barings' asset manager. "It's not like & # 39; they will talk for the next few days, and they bargain how much to spend on border security. & # 39; The market sees nothing that leads to progress. And when Congress reunites , Democrats will hold stronger hands. "

Usually, under a divided government, the party that does not hold the White House uses its leverage on the debt ceiling to extract concessions from the President.

In 2011 and 2013, the Republican Party of Congress demanded a deficit reduction which led to sharp cuts in agency budgets before they would vote to authorize more loan authorities. This time, Democrats can use it to request permanent repairs to the Deferred Action for Childhood Arrival program, or to get Republican approval for the sweeping ethics bill, or to save the Affordable Care Act.

But Trump's chief of staff is Mick Mulvaney – who, as an anti-deficit congressman, is one of those who threatens to drive the US economy off the cliff rather than let the Treasury borrow more money during the Obama administration.

Concerns about Trump's uncertainty and his aides are only exacerbated by events in the past two weeks, which have seen the sudden and ambiguous resignation of Secretary of Defense James Mattis, calls for Finance Minister Steven Mnuchin to be published awkwardly to the bank CEO to convince investors about liquidity the market when they were not worried from the start, and Trump's rounds of rounds repeatedly against Federal Reserve Chair Jay Powell for continuing to raise interest rates.

Although many investors also prefer to keep interest rates low too, they fear Powell's increase will have the opposite effect.

"Similar to previous extreme non-recession market events, the Fed needs to convey a clear message that they have made an interest rate increase," wrote analysts from Canaccord Genuity in a note to clients on Wednesday. "Our fear is an open criticism of the President who has politicized the Fed's decision, making it more difficult to do what is needed."


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