Download - US Shutdown
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SHUTDOWN
US
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How it all Triggered ??
From October 1 to 17, 2013, the United States federalgovernment entered a shutdown and curtailed mostroutine operations after Congress failed to enactlegislation appropriating funds for fiscal year 2014, or acontinuing resolution for the interim authorization of
appropriations for fiscal year 2014. Approximately800,000 federal employees were indefinitelyfurloughed, and another 1.3 million were required toreport to work without known payment dates. Only
those employees and services deemed "excepted"under the Anti-deficiency Act continued governmentoperations. The most recent previous U.S. federalgovernment shutdown was in 199596. The 16-dayduration of the October 2013 shutdown was the third-longest government shutdown in U.S. history
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A "funding gap" was created when the twochambers of Congress failed to agree to anappropriations continuing resolution. The
Republican-led House of Representatives, in partpressured and offered several continuingresolutions delaying or defunding the PatientProtection and Affordable Care Act (commonly
known as "Obamacare"). The Democratic-ledSenate passed several amended continuingresolutions for maintaining funding at current
sequester levels with no additional conditions.Political fights over this and other issues betweenthe House on one side and President Barack Obamaand the Senate on the other led to the US
Shutdown.
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Timeline of events October 1, 2013 (2013-10-01)Government shuts down
October 2, 2013 (2013-10-02)Obama meets with Republican andDemocratic leaders, but no agreement is reached. House begins passing"mini" appropriations bills. Senate Majority Leader refuses to bring "mini"bills to vote
October 9, 2013 (2013-10-09)President Obama invites the entireCongress to meet with him about the government shutdown and upcomingdebt ceiling. Separate meetings for House Democrats, House Republicans,Senate Democrats, and Senate Republicans were suggested. The Houseleadership responded that they would send 18 members to meet withObama.
October 16, 2013 (2013-10-16)Congress plans last-minute votes to avert
default. The plan would allow the U.S to continue borrowing until February7. House of Representatives Speaker John Boehner said he would allow thedeeply divided House to vote on the Senate plan to move the debt limit anda government reopening. The Senate passed the bill by a vote of 81 to 18. Itpassed in the House a few hours later, 285 for and 144 against. PresidentObama signed the bill into law at 12:30am on October 17, effectively ending
the shutdown and debt ceiling crisis.
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2 MAIN PEOPLE INVOLVED
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We view the on-going political stand-off leading to
the US government shutdown more as a false alarm
rather than anything else as indicated by theevolution of the S&P 500 in the below graph from
CITI's recent Global Macro Strategy note from the
3rd of October entitled: "Complacency justified?"
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Effects of Shutdown on ROW
Following are the federal government agencies thatwere affected by the shutdown-
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1. Department of Commerce
2. Department of Defense
3. Military Academies4. Department of Education
5. Department of Energy
6. Department of Health and Human Services7. Centers for Disease Control and Prevention
8. Food and Drug Administration(FDA)
9. Department of Homeland Security
10.NASA
11.The White House and others as well
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Effect on Businesses
Defense contractors and some manufacturers has experienced
disruptions as the shutdown prevented those companies from
delivering goods and receiving payments for work already done.United Technologies announced that if the shutdown was not
resolved by October 7, it would furlough 2,000 employees at a
military helicopter manufacturing subsidiary, Sikorsky Aircraft.
Lockheed Martin announced plans to furlough 3,000 employees onOctober 7.
Small businesses are facing delays in receiving loans from the Small
Business Administration. Many of these companies may need to turn
to alternative funding sources that charge much higher interest rates.
One alternative source of credit, merchant cash advances, charge
interest rates of between 40% and 100%.
Similarly, Airbus was unable to deliver new airplanes to the airlines
JetBlue and US Airways because Federal Aviation Administration
personnel who certify airplanes were furloughed
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DEBT CEILING
On October 11, Senator Susan Collins (R-ME)
developed a proposal to lift the debt ceiling
and end the shutdown. Democrats in the
Senate rejected this proposal because it wouldhave locked sequestration budget cuts into
law for the next six months. Democratic
senators wanted to negotiate an end tosequestration before then
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Analysts were concerned that the political gridlock would
extend into mid-October, when Congress and the
President must agree to raise the debt ceiling to avoid
the prospect of defaulting on the public debt. Following
the debate over the debt ceiling in May 2013, the
Treasury Department was forced to engage inextraordinary measures to fund the government. In
August 2013, the Treasury informed Congress that the
extraordinary measures would be insufficient starting in
mid-October and further specified, in late September,that the U.S. would begin to default on its debts if a new
debt ceiling was not approved by October 17.
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On October 2, President Obama explicitly linked the government
shutdown to the debt ceiling issue, stating that he would not
reopen budget negotiations until Republicans agreed to passageof a bill raising the debt limit.
On October 7, the Moody's bond credit rating agency released a
memo stating that it was unlikely the U.S. would risk a default on
its public debt, and that the nation instead "would continue to
pay interest and principal on its debt". The memo further stated
that the financial situation was more serious in 2011 than the
2013 problem. However, such prioritizing of debt payments over
all other needs would require that the government default on
many other payment obligations, likely including a wide array ofbusiness contracts, employee salaries, social insurance benefits,
and other programs. The Council on Foreign Relations said that
among the payments implicated were military wages, Medicare
and Social Security payments, and unemployment support.
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Potential effects
Yalman Onaran of Bloomberg News wrote that the government'sfailure to raise the debt ceiling and pay its debt would "halt a $5 trillionlending mechanism for investors who rely on Treasuries, blow upborrowing costs for billions of people and companies, ravage the dollarand throw the U.S. and world economies into a recession that probablywould become a depression", noting that a government default would
be 23 times larger than the Lehman Brothers bankruptcy during theGreat Recession. On October 15, 2013, Fitch, the credit rating agency,placed the U.S. AAA ratings on "rating watch negative" as talks toincrease the debt limit reached an impasse fueling concerns ofcongressional dysfunction and impending default.
Japanese Finance Minister Taro Aso said that the debt limit would have
an "internationally significant impact". On how the US situation couldaffect Japan, he said "I think this could likely result in a situation wherethe dollar will be sold and the yen will be bought." The falling dollar isbad news for Japan's exporters, a key driver of growth in the world'sthird-largest economy, because it erodes their repatriated profits.
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Global Effect of Shutdown
United Kingdom Prime Minister David Cameron stated the USA
shutdown should serve as a reminder on how public expenditureshould be prudently controlled; otherwise, a deficit is inevitable
People's Republic of China An editorial in the state-run Xinhua
news service, the official press agency of the country, said The United
States ,the worlds sole superpower is bearing the consequences ofengaging in irresponsible spending for years. It also called it a
"bizarre" development and warned that the damage will multiply "if
the drama drags on.
Asia Pacific- On October 4, the White House announced thatPresident Obama's upcoming trip to Brunei, Malaysia, the Philippines,
and Indonesia, where he was scheduled to attend the 2013 Asia-
Pacific Economic Cooperation meeting in Bali, would be cancelled
due to the government shutdown
E O O b 4 U S T d R i Mi h l
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Europe- On October 4, U.S. Trade Representative Michael
Froman announced that a scheduled meeting with
European Union diplomats regarding the proposed Trans
Atlantic Free Trade Area (TAFTA) would be postponed asU.S. officials could not travel to Brussels.
Japan- Finance Minister said I think this could likely result
in a situation where the dollar will be sold and yen will be
bought but falling dollar is a bad news for Japans
exporters.
Russia- Regarding the cancellation of meeting between
Obama and Putin ,the press secretary of Putin said there isa severe need of continued dialogue on issues like [Syria
and Edward Snowden].
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Economic Effect of Shutdown
In this section of the presentation we will try to look at all those
adverse effects that the economy faced due to Shutdown and theseare as follows-
Moody's Analyticsestimated that a shutdown of three to fourweeks would cost the economy about $55 billion. Lost wages ofFederal employees will amount to about $1 billion a week.
Goldman Sachs estimated that a three-week shutdown wouldreduce the Gross Domestic Product of the United States by 0.9%.
According to the Los Angeles Times, a two-week shutdown wouldreduce GDP growth in the fourth quarter by 0.3 to 0.4 percentage
points. By comparison, the GDP has grown by less than 2% in 2013 The negative economic effect of the shutdown will be particularly
severe in the Washington D.C. metropolitan area. Approximately700,000 D.C. area jobs could be affected at a cost of $200 million aday
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The State of Maryland predicted that it would lose approximately
$5 million a day in tax revenue. A press release from the National Park Servicesaid the shutdown
of national parks would result in losses of $76 million a day intourism-related sales among local communities, but during the
government shutdown the National Park Service website was
unavailable.
During the month of October, tourists spend about $2.7 million aday at the Grand Canyon National Park and other National Parks in
Arizona.
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N l t l k t h th t k k t i d i
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Now, lets look at how the stock market was moving during
the shutdown period-
On 7thOctober , the Dow Jones Industrial Average fell below the
level of 15000 to end at 14936.Similar situation was prevailing inother stock exchanges of US like- NYSE etc and not only US but the
share markets around the world were affected by this shutdown . Like
in India the key driving sector of the economy i.e. IT Sector was
experiencing a downfall everyday with major companies like TCS ,
Infosys and Mahindra Satyam making new lows in every intraday
trade session.
Similarly many other businesses were either directly or indirectly
affected this event and were experiencing heavy losses because of
this 16 day long shutdown , especially those businesses that were
connected with federal organisations.